The fluctuation of exchange rates is a significant risk factor for Sedantha Inc., a company based in Velezland that imports miniature grape vines from the country of Highlands. The company usually purchases these vines during early fall and decides to pay for them after a few months. This could be termed as a risky exchange because the true cost of the vines can swing dramatically with currency shifts. In this scenario, Sedantha Inc. can eliminate currency risk by using _____ to lock in an exchange rate.

Question

Quizplus · Accepted Answer

Forward contracts allow companies to lock in an exchange rate for a transaction that will occur in the future, thus eliminating the risk associated with fluctuating exchange rates.

The Fluctuation of Exchange Rates Is a Significant Risk Factor