AFB, Inc purchases a new delivery van which is expected to increase cash flows for the next 10
years. AFB can finance the purchase with a standard 48-month vehicle loan, or by getting a 10-year
loan from the bank.
According to the hedging principle, AFB should
A) use the 10-year financing in order to match the cash flow stream from the asset with the
financing repayments.
B) use the 48-month loan since it matches the type of asset with the type of loan.
C) avoid using either loan and finance the truck with current cash reserves to avoid interest
expense.
D) use either type of financing, but hedge the risk in the options market.
A
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Indicate whether the statement is true or false