Which of the following reflects a hedge of net receivables in British pounds by a US firm?
A) Purchase a currency put option in British pounds.
B) Sell pounds forward.
C) Borrow US dollars, convert them to pounds, and invest them in a British pound deposit.
D) A and B

Question

Quizplus · Accepted Answer

Selling pounds forward is a hedge of net receivables in British pounds because it locks in the exchange rate at which the receivables will be converted into US dollars. Purchasing a currency put option in British pounds is also a hedge of net receivables in British pounds because it gives the firm the right to sell British pounds at a specified exchange rate, which protects the firm from a decline in the value of the British pound.

Which of the Following Reflects a Hedge of Net Receivables