Question

If you are expecting a large quantity of euros in one month which you need to...

If you are expecting a large quantity of euros in one month which you need to exchange for dollars and are not sure where the exchange rate is going but want to reduce your risk

buy a forward contract on euros

sell a forward contract on euros and buy a forward contract on dollars

sell a forward contract on euros

remain unhedged

take a long position in a FRA
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Answer #1

Option ( C) is correct.

We should sell a forward contract on euros.

If we are to receive the euros after one month and these to be converted into dollars, and with exchange rate uncertainty, then it is better to sell a forward contract on euros. Because, if price is going to be drop, then selling forward can help in mitigating / reducing loss because we are selling now, while the price is still high, as opposed to selling at a loss when the prices are dropped.

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