A U.S.importer scheduled to make a payment of €100,000 in three months can hedge his foreign exchange risk by:

Question

Quizplus · Accepted Answer

To hedge foreign exchange risk for a payment to be made in Euros in three months, the importer should purchase Euros forward for delivery in three months. This locks in the exchange rate now, eliminating the risk of adverse exchange rate movements. Selling Euros in the spot market for delivery in three months or buying dollars in the forward market for delivery in three months would not hedge the risk of paying in Euros.

A USImporter Scheduled to Make a Payment of €100,000 in Three