Question

A US importer scheduled to make a payment of €100 000 in 3 months can hedge...

A US importer scheduled to make a payment of €100 000 in 3 months can hedge his foreign exchange risk by

a. purchasing $100 000 in the forward market for delivery in 3 months

b. selling €100 000 in the spot market for delivery in 3 months

c. purchasing €100 000 in the forward market for delivery in 3 months

d. selling $100 000 in the spot market for delivery in 3 months

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Answer #1

Hedging refers to an investment to reduce of adverse price movements in an asset. So, it can be said that hedging covers a foreign exchange risk.

Forward market hedge implies that if one country is going to owe foreign currency in the future, it should agree to buy the foreign currency now by entering into long position in a forward contract and if it is going to receive foreign currency in the future, it should agree to sell the foreign currency now by entering into short position in a forward contract.

So, Us importer scheduled to make a payment of 100000 Euro in 3 months can hedge his foreign exchange risk by purchasing 100000 Euro in the forward market for delivery in 3 months.

Hence, Option c. is correct.

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