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

Question

Quizplus · Accepted Answer

A forward contract is a financial contract between two parties who agree to transact at a predetermined future date and at a predetermined price. In this case, the international firm can enter into a forward contract to buy or sell foreign currency at a future date, thereby reducing its exposure to exchange rate risk. Since the firm is importing raw materials, it is likely to have a short-term exposure to exchange rate risk, which can be hedged with a short-run forward contract. Therefore, option D, short-run exchange, is the best choice.

An International Firm That Imports Raw Materials Can Reduce Its