If a firm must pay for goods it has ordered with foreign currency,it can hedge its foreign exchange rate risk by
A) selling foreign exchange futures short.
B) buying foreign exchange futures long.
C) staying out of the exchange futures market.
D) doing none of the above.

Question

Quizplus · Accepted Answer

Buying foreign exchange futures long would allow the firm to lock in a certain exchange rate for the foreign currency and thus eliminate the risk of the exchange rate moving against them when it comes time to pay for the goods. Selling foreign exchange futures short would expose them to even more risk, while staying out of the exchange futures market would leave them unprotected against exchange rate movements.

If a Firm Must Pay for Goods It Has Ordered