If a Firm Hedges a Future Purchase of Euros by Purchasing

question 24

Multiple Choice

If a firm hedges a future purchase of euros by purchasing a call option, the firm ________ the potential cost but will benefit if the euro ________.

• A) fixes, depreciates
• B) fixes, appreciates
• C) caps, depreciates
• D) caps, appreciates

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Definitions:

Spot Rates

The immediate exchange rate at which one currency can be exchanged for another currency on the foreign exchange market.

Exchange Rates

The rate at which one currency can be exchanged for another, influencing international trade and investment decisions.

Forward Contract

A non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today, often used for hedging risks.

Canadian Dollars

The currency of Canada, represented as CAD or $.