A British company has a USD 1 million payable in two months.How can the British company hedge the foreign currency payable?
A) Buy pounds in the forward market
B) Sell pounds in the spot market
C) Sell US dollars in the spot market
D) Buy US dollars in the forward market

Question

Quizplus · Accepted Answer

The British company can hedge their foreign currency payable by buying US dollars in the forward market. This will ensure that they have the necessary funds to pay their obligation in two months at a fixed exchange rate, protecting them from any adverse currency fluctuations. Buying pounds in the forward market (option A) or selling pounds in the spot market (option B) would not protect the company from fluctuations in the US dollar exchange rate, which is what they need to hedge against. Selling US dollars in the spot market (option C) would not provide the company with the necessary funds to pay their obligation in two months.

A British Company Has a USD 1 Million Payable in Two