A business has a contractual requirement to pay a sum of $6m in a foreign currency in 12 months time. It takes out a forward foreign exchange contract for this sum. This is an example of:
A) translation risk avoidance
B) economic risk reduction
C) arbitrage
D) hedging

Question

Quizplus · Accepted Answer

The business is using a forward foreign exchange contract to lock in the exchange rate for a future transaction, which is a strategy to hedge against the risk of currency fluctuations.

A Business Has a Contractual Requirement to Pay a Sum