When a firm enters into a 90 day forward exchange contract
A) deliberately creates transaction exposure.
B) unintentionally eliminates all translation exposure.
C) does not create any exposure since the forward contract will deliver the notional amount at the current quote for the forward rate.
D) none of the above

Question

Quizplus · Accepted Answer

A forward exchange contract is a derivative contract that locks in the exchange rate for a future transaction. By entering into a forward exchange contract, a firm deliberately creates transaction exposure because it is committing to exchange a certain amount of currency at a specific rate in the future.

When a Firm Enters into a 90 Day Forward Exchange