An international ﬁrm that imports raw materials can reduce its _____ exposure to _____ rate risk by entering into a forward contract.

Question

Quizplus · Accepted Answer

The firm can reduce its short-run (implying a shorter time horizon) exposure to exchange rate risk (since it is an international firm and is therefore exposed to exchange rate fluctuations) by entering into a forward contract. A forward contract would enable the firm to lock in a specific exchange rate at which it can purchase the raw materials in the foreign currency in the future, thereby reducing uncertainty and mitigating potential losses from adverse exchange rate movements. The other answer choices are not relevant to the scenario or not as appropriate for addressing the stated risk.

An International ﬁRm That Imports Raw Materials Can Reduce Its