Your U.S.-based firm is deciding between using currency futures contracts or a forward contract with its commercial bank in order to hedge a scheduled dividend from its subsidiary corporation in Germany.The dividend will be repatriated in July,while the currency futures contracts are only available for June or September delivery.Which of the following choices properly hedges the transaction without basis risk?

Question

Quizplus · Accepted Answer

A forward contract to sell Euros in July matches the timing of the dividend repatriation, eliminating basis risk associated with futures contracts that do not align with the exact timing.

Your US-Based Firm Is Deciding Between Using Currency Futures Contracts or or a Forward