A U.S. firm has borrowed £50 million from a British firm. The borrower will need to convert dollars to pounds to repay the loan when it is due. The U.S. firm could hedge the exchange rate risk by

Question

Quizplus · Accepted Answer

Buying pound forward will protect the U.S. firm from exchange rate fluctuations and help them lock in a fixed exchange rate for when the loan repayment is due. Selling pounds forward would be appropriate if the British firm had borrowed dollars and was at risk of exchange rate fluctuations when repaying the loan. Borrowing pounds would not hedge the U.S. firm from exchange rate risk. Selling pounds forward and borrowing pounds are not necessary as buying pounds forward alone would cover the exchange rate risk.

A US Firm Has Borrowed £50 Million from a British Firm