A company enters into a futures contract with the intent of hedging an account payable of DM400,000 due on December 31. The contract requires that if the U.S. dollar value of DM400,000 is greater than $200,000 on December 31, the company will be required to pay the difference. Alternatively, if the U.S. dollar value is less than $200,000, the company will receive the difference. Which of the following statements is correct regarding this contract?
A) The Deutsche mark futures contract effectively hedges against the effect of exchange rate changes on the U.S. dollar value of the Deutsche mark payable.
B) The futures contract is a contract to buy Deutsche marks at a fixed price.
C) The futures contract is a contract to sell Deutsche marks at a fixed price.
D) The contract obligates the company to pay if the value of the U.S. dollar increases.

Question

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The Answer of A company enters into a futures contract with the intent of hedging an account payable of DM400,000 due on December 31. The contract requires that if the U.S. dollar value of DM400,000 is greater than $200,000 on December 31, the company will be required to pay the difference. Alternatively, if the U.S. dollar value is less than $200,000, the company will receive the difference. Which of the following statements is correct regarding this contract?
A) The Deutsche mark futures contract effectively hedges against the effect of exchange rate changes on the U.S. dollar value of the Deutsche mark payable.
B) The futures contract is a contract to buy Deutsche marks at a fixed price.
C) The futures contract is a contract to sell Deutsche marks at a fixed price.
D) The contract obligates the company to pay if the value of the U.S. dollar increases.

A Company Enters into a Futures Contract with the Intent