How can a futures contract mitigate exchange rate risk for an exporting firm?
A) Exporters can pin down the exact exchange rate they want to trade at and ensure a certain income stream.
B) Exporters can avoid international trade and enter into contracts for domestic items only.
C) The contract does so by allowing exporters to avoid political risks associated with exchange rate volatility.
D) The contract does so by allowing exporters to trade in alternate stable currencies.

Question

Quizplus · Accepted Answer

By entering into a futures contract, an exporter can lock in a specific exchange rate for a future transaction, thus eliminating the risk of exchange rate fluctuations. This allows the exporter to have a certain income stream and plan accordingly for the future, mitigating any potential exchange rate losses.

How Can a Futures Contract Mitigate Exchange Rate Risk for an Exporting