An example of hedging to control currency exchange rate risk is a wine distributor ____.
A) currently importing wine made from the 2010 vintage
B) paying for wine today that will be delivered in three years
C) that visits the vineyard where wine is made before buying the vintage
D) that settles all of its bills with euros

Question

Quizplus · Accepted Answer

By paying for wine today that will be delivered in three years, the wine distributor is locking in the exchange rate at the time of payment and reducing their exposure to currency exchange rate risks. This is a hedging strategy known as a forward contract. The other choices do not directly address controlling currency exchange rate risk.

An Example of Hedging to Control Currency Exchange Rate Risk