A U.S. manufacturer arranges to purchase parts from a German supplier for 500,000 euros in six months. The U.S. manufacturer is concerned that the dollar will depreciate against the euro, meaning the dollar cost of the 500,000 euros will rise. What should the U.S. manufacturer do?
A) lobby the Fed to lower interest rates on six-month T- bills
B) buy a futures contract that fixes the dollar cost of 500,000 euros in six months
C) buy an exchange rate contract that pegs the interest rate to the discount rate on interbank loans
D) sell a naked option to cover the output spread

Question

A U.S. manufacturer arranges to purchase parts from a German supplier for 500,000 euros in six months. The U.S. manufacturer is concerned that the dollar will depreciate against the euro, meaning the dollar cost of the 500,000 euros will rise. What should the U.S. manufacturer do?
A) lobby the Fed to lower interest rates on six-month T- bills
B) buy a futures contract that fixes the dollar cost of 500,000 euros in six months
C) buy an exchange rate contract that pegs the interest rate to the discount rate on interbank loans
D) sell a naked option to cover the output spread

Quizplus · Accepted Answer

By buying a futures contract, the U.S. manufacturer can fix the dollar cost of 500,000 euros in six months, regardless of any potential depreciation of the dollar. This provides certainty and eliminates potential currency risk. A, C, and D are not relevant or effective solutions for this situation.

A US Manufacturer Arranges to Purchase Parts from a German Supplier