How Can a Currency Futures Contract Be Used as a Hedge

question 126

Multiple Choice

How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that a U.S. company is expecting to convert into U.S. dollars?

• A) The U.S. company should sell the foreign currency using futures contracts.
• B) The U.S. company should buy more foreign currency futures contracts than it should sell.
• C) The U.S. company should buy the foreign currency using futures contracts.
• D) This is a standard business situation that would be favorable if it were to happen, so no hedge is needed.

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Definitions:

Interest Rate

The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage.

Present Value

The present value of a future amount of money or a series of cash flows, discounted at a given rate of return.

Payment Streams

A series of financial transactions occurring over time, such as regular payments of interest or principal on a loan.

Capital Projects

Large-scale, long-term investments aimed at improving an organization's capacity or capabilities, often involving infrastructure, technology, or facilities.