Which of the following is cited as a good reason for NOT hedging currency exposures?

Question

BlackTom AI · Accepted Answer

To approach this question, we first restate the prompt and lay out the options clearly so each one can be evaluated on its own merits.
Question: Which of the following is cited as a good reason for NOT hedging currency exposures?
Options:
A. Shareholders are more capable of diversifying risk than management.
B. Hedging activities are often of greater benefit to management than to shareholders.
C. Currency risk management through hedging does not increase expected cash flows.
D. All of the above are cited as reasons NOT to hedge.

Now, evaluate each option individually:
Option A: Shareholders are more capable of diversifying risk than management. This statement suggests a principal-agent type argument where shareholders bear the diversification burden themselves rather than relying on corporate hedging by management. The logic is that diversification is partly a shareholder concern, which could be used as a rationale against hedging to avoid duplicative risk management efforts. The potential shortcoming here is that corporate hedging can still be beneficial if it reduces firm-specific risk or aligns cash flows with strategic needs, so this reason alone may not be universally cited as a strong argument against hedging, but it is a commonly discussed point in some critiques.
Option B: Hedging activities are often of greater benefit to management than to shareholders. This reflects agency cost concerns, where managers might gain from hedging strategies (e.g., perks, incentives, risk reduction for personal job security) even if shareholders do not benefit proportionally. It’s a reason cited to question the usefulness or alignment of hedging with shareholder welfare, though it is not universally accepted as conclusive evidence against hedging.
Option C: Currency risk management through hedging does not increase expected cash flows. This asserts that hedging primarily shifts risk without boosting expected returns, implying no value-add from hedging in terms of cash flow uplift. If true, it undermines the case for hedging on the basis of increasing expected cash flows, which is a common argument against hedging when hedges are viewed as cost centers with uncertain payoff.
Option D: All of the above are cited as reasons NOT to hedge. This option contends that A, B, and C collectively constitute the basis for arguing against hedging, aggregating the individual concerns into a single justification.

Putting it together, each of A, B, and C can be framed as a rationale discussed in literature or practical critiques for why hedging currency exposures might not be pursued. Since the prompt asks which is cited as a good reason, and option D asserts that all of the above are cited, selecting D hinges on recognizing that the set of reasons is often discussed collectively in some texts or analyses as part of arguments against hedging. If one accepts that A, B, and C are each plausible points in the debate, then D correctly captures that collection as the cited rationale. If any one of A–C were not considered a valid reason in a given context, D would be incorrect, but the framing here implies that all three are presented as reasons, thus making D the comprehensive choice.

In a typical exam or study scenario, you’d use option D when the question intends to test your understanding of a composite critique: that multiple arguments exist against hedging, and the correct choice recognizes that those arguments are cited together rather than in isolation. The other choices, taken individually, would be incomplete because they cover only part of the critique and do not reflect the broader consensus that the combination of these points is used to argue against hedging.

Which of the following is cited as a good reason for NOT hedging currency exposures?

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Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should .

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Which of the following is cited as a good reason for NOT hedging currency exposures?

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类似问题

Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.

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希望你的学习变得更简单

Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should .