Prudence is careful to plan ahead.She is going to Paris next year to study.To protect herself from exchange rate fluctuations, she bought a futures contract for the number of francs she plans to spend next year, given current prices.When she arrives in Paris, she can cash in her contract for this many francs no matter what the exchange rate is.If the value of the franc relative to the dollar should happen to fall before she gets to Paris, she
A)will be at least as well off and probably better off than if the exchange rate hadn't changed.
B)will be worse off than if the exchange rate hadn't changed.
C)will be exactly as well off as if the exchange rate hadn't changed.
D)might be better off or she might be worse off, depending on whether she plans to spend more or less than she does at home.

Question

Quizplus · Accepted Answer

By buying the futures contract, Prudence locked in a set exchange rate for her francs, regardless of any fluctuations in the market. If the value of the franc falls relative to the dollar, she will still be able to cash in her contract for the same number of francs as before. This means she will be protected from any potential losses due to exchange rate fluctuations and will likely be at least as well off, if not better off, than if the exchange rate hadn't changed.

Prudence Is Careful to Plan Ahead