Which of the following statements about using hedges to increase firm value is (are)true?
A)The management of a high-beta firm can increase firm value by selling P 500 Index futures contracts.
B)The management of a construction company may be able to increase firm value by buying lumber futures contracts, but only if the market is imperfect.
C)In a perfect market, the management of a firm with global operations can increase firm value by using foreign currency futures contracts to hedge against adverse movements in The currency.
D)All of the above statements are true.

Question

Which of the following statements about using hedges to increase firm value is (are)true?
A)The management of a high-beta firm can increase firm value by selling P 500 Index futures contracts. 
B)The management of a construction company may be able to increase firm value by buying lumber futures contracts, but only if the market is imperfect. 
C)In a perfect market, the management of a firm with global operations can increase firm value by using foreign currency futures contracts to hedge against adverse movements in The currency. 
D)All of the above statements are true.

Quizplus · Accepted Answer

A is false because selling S&P 500 Index futures contracts cannot increase firm value for a high-beta firm. It may be used to manage risk, but it will not increase firm value.
C is false because in a perfect market, using foreign currency futures contracts to hedge against adverse movements in the currency will not increase firm value because the market has already incorporated all available information about future movements in the currency. 
B is true because buying lumber futures contracts can increase firm value for a construction company if the market is imperfect, and the company is able to exploit market inefficiencies to make a profit from the contracts. Statement (A) is incorrect because selling S&P 500 Index futures contracts would not necessarily increase firm value for a high-beta firm. Statement (C) is incorrect because in a perfect market, using foreign currency futures contracts would not increase firm value since there would be no risk to hedge against. Statement (B) is true because a construction company can use lumber futures contracts to hedge against price volatility in the lumber market, which can increase firm value in an imperfect market.

Which of the Following Statements About Using Hedges to Increase