A U.S. timber products firm has a long-term contract to import unprocessed logs from Canada. To avoid occasional and unpredictable changes in the exchange rate between the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the impact of any exchange rate movement. This type of agreement is referred to as:
A) risk-sharing.
B) currency-switching.
C) matching.
D) a natural hedge.

Question

Quizplus · Accepted Answer

The type of agreement described is known as "risk-sharing" where the impact of exchange rate movements is shared between the two firms to avoid unpredictable changes in the exchange rate. Choice B, currency-switching, would involve the firm changing currencies to avoid exchange rate risk, which is not the case here. Matching (choice C) refers to matching the currency of assets and liabilities to eliminate currency risk, which is not applicable in this scenario. A natural hedge (choice D) involves offsetting one type of risk with another to reduce overall risk exposure, which is not what is happening in this situation.

A US Timber Products Firm Has a Long-Term Contract to Import