An American company imports steins from Germany. The steins will be delivered in 6 months, at which time payment will be due. The CFO wants to hedge against currency
Fluctuations. To do so, she should

Question

Quizplus · Accepted Answer

Since the American company will need to eventually pay the German company in euros, it is important to hedge against the risk of the euro strengthening and making the payment more expensive for the American company. Therefore, entering a forward contract to buy euros in 6 months will help mitigate this risk. Since the company will be making payment in euros, it should enter a forward contract to buy euros in 6 months. This will allow the company to lock in the exchange rate now and eliminate the risk of currency fluctuations.

An American Company Imports Steins from Germany