Assume you are an American importer who must pay 500,000 euros at the end of 90 days when you receive 1,000 cases of French wine at your warehouse in New York. If you do not hedge this transaction, you face exchange-rate risk. The best way to remove the risk of loss due to currency fluctuations is to:

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Quizplus · Accepted Answer

The best way to remove exchange rate risk is to use a forward contract, which allows the importer to lock in a specific exchange rate for a specific amount of currency at a specified future date. By buying 500,000 euros in the forward exchange market for delivery in 60 days, the importer can ensure that they will have the necessary euros to pay for the French wine without being subject to exchange rate fluctuations. Buying euros now and holding them for 60 days exposes the importer to the risk of exchange rate fluctuations during that time period. Selling euros does not help the importer meet their obligation to pay for the French wine.

Assume You Are an American Importer Who Must Pay 500,000