To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.
A) receivable; purchase
B) payable; sell
C) payable; purchase
D) none of the above

Question

Quizplus · Accepted Answer

If a firm has a foreign currency payable, it may purchase a currency futures contract for that currency as a hedge. This will allow the firm to lock in a future price for the currency, and protect against any adverse movements in the exchange rate. Choice A is incorrect because if a firm has a foreign currency receivable, it would sell a currency futures contract instead of purchasing one. Choice B is incorrect because if a firm has a foreign currency payable, it wouldn't sell a currency futures contract as it would expose the firm to the risk of the foreign currency appreciating in value.

To Hedge a ____ in a Foreign Currency, a Firm