A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future.Which of the following is true
A) A forward contract can be used to lock in the exchange rate
B) A forward contract will always give a better outcome than an option
C) An option will always give a better outcome than a forward contract
D) An option can be used to lock in the exchange rate

Question

Quizplus · Accepted Answer

A forward contract ensures that the effective exchange rate will equal the current forward exchange rate.An option provides insurance that the exchange rate will not be worse than a certain level,but requires an upfront premium.Options sometimes give a better outcome and sometimes give a worse outcome than forwards.

A Company Knows It Will Have to Pay a Certain