If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could:

Question

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A 90-day forward purchase contract on Canadian dollars would allow the firm to lock in the exchange rate for the C$200,000 payment, eliminating the risk of exchange rate fluctuations. Option B would not be helpful as it would involve selling Canadian dollars instead of buying them, which would not help the firm make the needed payment. Options C and D involve relying on the spot rate in the future, which could be unpredictable and subject to fluctuations.

If a US Firm Desires to Avoid the Risk from Exchange Rate