Assume that a firm purchases foreign currency in order to complete the purchase of raw material from an overseas supplier. The currency is purchased today at an exchange rate that is good only for today. This transaction is referred to as a(n) ________ transaction.

Question

Quizplus · Accepted Answer

A spot transaction refers to the purchase or sale of currency for immediate delivery. This scenario involves the use of foreign currency to purchase materials from an overseas supplier at an exchange rate that is only valid for that day, thus making it a spot transaction. A forward transaction is a contractual agreement to buy or sell currency at a future date at an agreed-upon exchange rate. Arbitrage refers to the practice of taking advantage of price differences in different markets to make a profit. A hedge is a risk management strategy used to reduce exposure to potential losses.

Assume That a Firm Purchases Foreign Currency in Order to Complete