ExpertMedium1 markMultiple Choice
CPA · Question 17 · Area I: Business Analysis
A US-based exporter expects to receive €1,000,000 in three months. The current spot rate is $1.10/€. The exporter is concerned that the Euro might depreciate against the Dollar. Which of the following hedging strategies is MOST appropriate to mitigate this risk?
A US-based exporter expects to receive €1,000,000 in three months. The current spot rate is $1.10/€. The exporter is concerned that the Euro might depreciate against the Dollar. Which of the following hedging strategies is MOST appropriate to mitigate this risk?
Answer options:
A.
Buy Euro call options.
B.
Enter into a forward contract to sell Euros.
C.
Enter into a forward contract to buy Euros.
D.
Do nothing, as currency fluctuations will average out.
How to approach this question
Identify the exposure: Receivable = Long position (you have the foreign currency). Hedge: Short position (sell the foreign currency).
Full Answer
B.Enter into a forward contract to sell Euros.✓ Correct
The exporter has a receivable in Euros. If the Euro weakens (depreciates), they receive fewer Dollars. To lock in the rate, they should agree to SELL Euros at a fixed rate in the future (Forward Contract to Sell). Alternatively, they could buy Put options (right to sell).
Common mistakes
Confusing buy/sell direction; confusing call/put options.
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