Which of the following provides the best hedge against exchange variations in the value of a stream of income in a foreign currency where the payments are expected to occur in equal amounts over a period of five years?
A) Borrowing in the foreign currency with repayment due at the end of the five years.
B) Borrowing in Canadian dollars with repayment due at the end of the five years.
C) Borrowing in the foreign currency with annual repayments equal to the expected annual revenue cash flows.
D) Borrowing in Canadian dollars with annual repayments equal to the expected annual revenue cash flows.

Question

Quizplus · Accepted Answer

Borrowing in the foreign currency with annual repayments equal to the expected annual revenue cash flows provides the best hedge against exchange variations in the value of a stream of income in a foreign currency. This strategy ensures that the borrower will have enough of the foreign currency to meet their payment obligations each year, while also mitigating the risk of exchange rate fluctuations. Additionally, this strategy spreads the risk over time, making it less risky than borrowing in a lump sum and having to repay it all at once at the end of the five years.

Which of the Following Provides the Best Hedge Against Exchange