A United States. manufacturer arranges to purchase parts from a German supplier for 500,000 euros in six months. The United States manufacturer is concerned that the dollar will depreciate against the euro, meaning the dollar cost of the 500,000 euros will rise. The United States manufacturer should:

Question

Quizplus · Accepted Answer

Buying a futures contract that fixes the dollar cost of 500,000 euros in six months would provide protection against a potential depreciation of the dollar. By locking in a specific exchange rate now, the United States manufacturer would know exactly how much they will need to pay in dollars for the 500,000 euros when the payment is due in six months. This eliminates the risk of currency fluctuations and ensures predictable costs for the manufacturer. The other options listed are not the best choices for hedging against currency risk in this scenario.