Your U.S.-based firm is deciding between using currency futures contracts or a forward contract with its commercial bank in order to hedge a scheduled dividend from its subsidiary corporation in Germany. The dividend will be repatriated in July, while the currency futures contracts are only available for June or September delivery. Which of the following choices properly hedges the transaction without basis risk?
A)Long euro future contracts
B)Short euro future contracts
C)Forward to sell euros forward in July.
D)Forward to buy euros forward in July.

Question

Quizplus · Accepted Answer

A forward contract to sell euros forward in July directly matches the timing of the dividend repatriation, eliminating basis risk associated with the mismatch in timing that would occur with futures contracts for June or September.

Your US-Based Firm Is Deciding Between Using Currency Futures Contracts or or a Forward