On February 1,Rapido Corporation entered into a firm commitment to purchase specialized equipment from the Yamasake Trading Company for ¥65,000,000 on April 1.Rapido would like to reduce the exchange rate risk that could increase the cost of the equipment in U.S.dollars by April 1,but Rapido is not sure which direction the exchange rate may move.What type of contract would protect Rapido from an unfavorable movement in the exchange rate while allowing them to benefit from a favorable movement in the exchange rate?
A) Interest rate swap
B) Forward contract
C) Call option
D) Put option

Question

Quizplus · Accepted Answer

A call option on the foreign currency (¥) would allow Rapido to benefit from a favorable exchange rate movement (i.e., if the ¥ weakens, they could buy ¥ at the lower market rate) while protecting them from an unfavorable movement (i.e., if the ¥ strengthens, they could exercise the option and buy ¥ at the pre-agreed rate). Interest rate swaps and forward contracts lock in a rate, eliminating the ability to benefit from favorable movements. A put option would not be appropriate as it gives the right to sell a currency, not buy.

On February 1,Rapido Corporation Entered into a Firm Commitment to Purchase