Firms use forward foreign exchange contracts rather than a cash-and-carry strategy because ________.

Question

Quizplus · Accepted Answer

Firms use forward foreign exchange contracts instead of cash-and-carry strategy for various reasons. Forward contracts have lower transaction costs as compared to cash-and-carry strategy because they involve a single transaction. Additionally, firms may not have access to borrow in different currencies, making cash-and-carry strategy impossible. Lastly, if a firm's credit quality is poor, it may have to pay higher interest costs in the cash-and-carry strategy, making forward contracts more appealing. Hence, all the given options are correct, and the correct answer is D.

Firms Use Forward Foreign Exchange Contracts Rather Than a Cash-And-Carry