Firms exposed to the risk of interest rate changes may reduce that risk by
A) obtaining a Eurodollar loan.
B) hedging in the commodities market.
C) hedging in the financial futures market.
D) pledging or factoring accounts receivable.

Question

Quizplus · Accepted Answer

Hedging in the financial futures market is the best choice to reduce the risk of interest rate changes. In this market, firms can buy or sell futures contracts, which give them the right to buy or sell an underlying financial instrument, such as government bonds, at a specified price in the future. By doing so, firms can lock in a fixed interest rate and reduce their exposure to interest rate fluctuations. Obtaining a Eurodollar loan or pledging/factoring accounts receivable may not necessarily provide protection against interest rate changes. Hedging in the commodities market is also not relevant to reducing interest rate risk.

Firms Exposed to the Risk of Interest Rate Changes May