The following is an example of Radio Shack hedging its foreign currency risk:
A) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to buy yen.
B) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to sell yen.
C) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack buys yen at a spot-exchange 1 month from now.
D) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen at a spot-exchange 1 month from now.
E) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen in a forward-exchange deal.

Question

Quizplus · Accepted Answer

By making a forward-exchange deal to buy yen, Radio Shack is essentially locking in the exchange rate for the future. This means that even if the exchange rate were to move unfavorably in the meantime, Radio Shack can still pay its suppliers the agreed upon amount in yen without having to worry about the cost increasing due to unfavorable exchange rate movements.

The Following Is an Example of Radio Shack Hedging Its