Question

Spring Sun Company hedged its sale to a foreign customer. (a) Briefly, in your own words, what does that mean? You must include WHY they would do this. (b) What are the two requirements to qualify as a hedge?

Answer 1

a)

It means that Spring Sun Company has protected its sale proceeds to be received in future foreign customers from the risks which might occur.

They would do this to protect from the negative fluctuation of currency rates that can severely impact the accounts receivable and can lead to massive losses.

b) Two requirements to qualify as a hedge:-

1. A hedging instrument should be eligible.

2. Hedging should be done for eligible risks.

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