RedFliers orders 50,000 pieces of steel rods from its supplier in Xonamba, priced at 1 Xon each, when the exchange rate is 0.60 Xon per dollar. Instead of paying the supplier immediately, RedFliers sells its dollars at the current rate and agrees to buy Xonamba's currency in 30 days at a fixed forward price. In this way, the company manages to lock in the price of the exchange, eliminating the risk from currency fluctuations in the future. This scenario exemplifies that RedFliers is involved in _____.

Question

Quizplus · Accepted Answer

RedFliers is engaging in an FX swap, where it sells a currency (dollars) at the current exchange rate and agrees to buy it back (or another currency, in this case, Xonamba's currency) at a future date at a predetermined rate. This financial instrument is used to hedge against currency risk.

RedFliers Orders 50,000 Pieces of Steel Rods from Its Supplier