If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by

Question

Quizplus · Accepted Answer

To remove the risk of loss due to the appreciation of the pound, you can buy pounds in the forward market for delivery in 30 days. This locks in the exchange rate at the current rate, ensuring that you will not lose money even if the pound appreciates in value. Buying dollars in the forward market for delivery in 30 days (option A) or selling dollars in the forward market for delivery in 30 days (option B) does not address the risk associated with the value of the pound. Selling pounds in the forward market for delivery in 30 days (option D) would expose you to the risk of loss if the pound were to appreciate in value, which is the opposite of what you want to achieve.

If You Have a Commitment to Pay a Friend in Britain