ExpertHard1 markMultiple Choice
CPA · Question 18 · Area I: Business Analysis
A US-based exporter expects to receive €1,000,000 in 3 months. The current spot rate is $1.10/€. The exporter is concerned the Euro will depreciate. Which hedging strategy would BEST mitigate this risk?
A US-based exporter expects to receive €1,000,000 in 3 months. The current spot rate is $1.10/€. The exporter is concerned the Euro will depreciate. Which hedging strategy would BEST mitigate this risk?
Answer options:
A.
Buy Euro call options.
B.
Enter into a forward contract to buy Euros.
C.
Enter into a forward contract to sell Euros.
D.
Do nothing, as currency fluctuations average out over time.
How to approach this question
Identify the exposure: Long Asset (Receivable). Hedge with Short Instrument (Sell Forward or Buy Put).
Full Answer
C.Enter into a forward contract to sell Euros.✓ Correct
The exporter has a long position (receivable). To hedge, they should take a short position (sell forward). If the Euro drops, the gain on the forward contract offsets the loss on the receivable.
Common mistakes
Buying calls instead of puts; buying forwards instead of selling.
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