In the context of managing exchange rate risks, which of the following statements is true of forward exchange rate transactions?
A) It involves the purchase of foreign currency at present-day rates in anticipation of future transactions.
B) It involves the simultaneous purchase and sale of a given amount of currency at two different forward rates.
C) The forward rate at which a company and a bank agree to exchange currency is same as the spot rate.
D) The forward rate is a prediction of future spot rates that allows a company to bypass uncertainty in the currency market.

Question

Quizplus · Accepted Answer

Forward exchange rate transactions allow companies to lock in a specific exchange rate for a future date, thus providing a way to manage the risk associated with fluctuations in currency exchange rates. This is essentially a financial tool for hedging against future currency market uncertainties, not a prediction of future spot rates but a contractual agreement to exchange currencies at a predetermined rate.

In the Context of Managing Exchange Rate Risks, Which of the Following