A US multinational anticipates a large sale to a British importer.While the price of the goods is set,the importer may choose to purchase them from another source.The terms of sale are net 90.If the British pound is depreciating relative to the dollar,which of the following would be the best way to hedge the transaction risk associated with the depreciating pound?

Question

Quizplus · Accepted Answer

Purchasing a currency put option would provide the importer with the right, but not the obligation, to sell British pounds at a specified rate. This would protect the importer from a further decline in the pound's value relative to the dollar. Selling a forward or futures contract would require the importer to sell British pounds at a predetermined rate, which could ultimately be disadvantageous if the pound continues to depreciate. Purchasing a currency call option or futures contract would not effectively hedge the transaction risk associated with the depreciating pound.

A US Multinational Anticipates a Large Sale to a British