Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?
A) purchase a currency put option in British pounds.
B) sell pounds forward.
C) borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
D) A and B

Question

Quizplus · Accepted Answer

Option A, purchasing a currency put option, allows the firm to limit its potential losses if the pound depreciates against the dollar. Option B, selling pounds forward, locks in a specific exchange rate for the future and reduces the risk of exchange rate fluctuations. Therefore, combining these two options (A and B) would create a hedge for the net receivables in British pounds by a U.S. firm. Option C involves taking on additional currency risk rather than hedging it.

Which of the Following Reflects a Hedge of Net Receivables