Which of the following is correct when contracting ahead in the forward exchange market?
A) At contract close you pay either the forward rate that was contracted or the then-current rate.
B) Contracting ahead is always cheaper than waiting to pay spot rates.
C) Your cost is locked in from the beginning of the contract, regardless of market changes.
D) Paying spot price is safer than contracting forward.

Question

Quizplus · Accepted Answer

When contracting ahead in the forward exchange market, your cost is locked in from the beginning of the contract, regardless of market changes. This means that you will pay the agreed-upon forward rate at contract close, regardless of whether the then-current rate is higher or lower. Option A is incorrect because you do not have the option to pay the then-current rate at contract close - you have already locked in your cost with the forward rate. Option B is also incorrect because contracting ahead is not always cheaper than waiting to pay spot rates - it depends on market conditions. Option D is incorrect because paying spot price does not provide the certainty of cost that contracting ahead does.

Which of the Following Is Correct When Contracting Ahead in the Forward