You have a contractual obligation denominated in a foreign currency and to be paid in six months. You can hedge this exposure by buying the foreign currency in the forward market.

Question

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By buying the foreign currency in the forward market, you can lock in the exchange rate and eliminate the risk of currency fluctuations affecting the value of the payment. This is a common strategy for hedging foreign currency denominated obligations.

You Have a Contractual Obligation Denominated in a Foreign Currency