On February 1, Shoemaker Corporation entered into a firm commitment to purchase specialized equipment from the Okazaki Trading Company for ¥80,000,000 on April 1. Shoemaker would like to reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars by April 1, but Shoemaker is not sure which direction the exchange rate may move. What type of contract would protect Shoemaker from an unfavorable movement in the exchange rate while allowing them to benefit from a favorable movement in the exchange rate?
A) Interest rate swap
B) Forward contract
C) Call option
D) Put option

Question

Quizplus · Accepted Answer

A call option would allow Shoemaker to lock in a maximum exchange rate, protecting against unfavorable movements, while still allowing them to benefit if the exchange rate moves favorably.

On February 1, Shoemaker Corporation Entered into a Firm Commitment