1. Why is the gain in a firm's value greater when more of its future foreign currency income is in the low tax region of the tax code?
2. Why would the managers of a firm take a foreign project with a lower domestic currency NPV and a higher return variance rather than a foreign project with a higher domestic currency NPV but a lower return variance?
3. Why would a firm ever forgo a positive NPV project? How can hedging help prevent this situation from arising?
4. Suppose the cash flows from financial hedging are pooled with the cash flows from a firm's operations and that the stockholders cannot ascertain the ultimate sources of profits and losses. Would the managers of the firm want to hedge or to speculate in the forward foreign exchange market?
5. Why is internally generated cash flow of such importance to Merck? Can't Merck use the financial markets as a source of funds?
6. True or false: The cost or benefit of hedging foreign exchange risk when a firm is selling the foreign currency forward is accurately measured by the forward discount or premium on the foreign currency.