A U.S. company has payables denominated in euros that it hedges with foreign currency forward purchase contracts. The U.S. dollar strengthens against the euro.
Which statement is true?

Question

Quizplus · Accepted Answer

When the U.S. dollar strengthens against the euro, the company will recognize a gain on its euro-denominated payables because it will require fewer dollars to settle these payables. Conversely, the company will incur a loss on the forward purchase contracts, as it has locked in a rate to purchase euros at a now higher rate than the market rate. Both of these effects are typically recognized in the income statement, making option A correct.

A US Company Has Payables Denominated in Euros That It Hedges