The Hagard Mercantile Company has made a $30 million investment in a mill in Germany and fears a substantial decline in the mark's current spot rate from $0.63 to $0.56 lowering the value of the company's investment in the mill.Which of the following currency contracts can help Hagard solve this problem?

Question

Quizplus · Accepted Answer

By purchasing a put currency option, Hagard Mercantile Company can protect itself from the downside risk of a decline in the spot rate of the German mark. This contract will allow the company to sell the marks at a predetermined strike price, even if the market rate falls below that price. This way, the company can limit its losses on the investment in case the mark depreciates against the dollar. The other options (A, C, D) may also help to manage the currency risk, but the put currency option is the most suitable in this case, as it provides the most flexibility in terms of timing and amount.

The Hagard Mercantile Company Has Made a $30 Million Investment