A foreign manufacturer must make a $2 million payment to its Canadian supplier in 60 days.Which of the following is correct?
A)The firm hopes that the Canadian Dollar appreciates within the 60 days.
B)The firm's exchange rate risk is hedged.
C)The firm faces contractual exchange rate risk.
D)The current spot exchange rate is likely to be trading at a premium.

Question

Quizplus · Accepted Answer

The foreign manufacturer is facing contractual exchange rate risk because they have a fixed payment that needs to be made in the future and are uncertain about the exchange rate at that time. Option A is incorrect because whether the Canadian dollar appreciates or depreciates, it will affect the foreign manufacturer's payment in the same way. Option B is incorrect because the question does not provide any information about whether the foreign manufacturer has hedged their exchange rate risk or not. Option D is also incorrect because the question does not provide any information about the current spot exchange rate.

A Foreign Manufacturer Must Make a $2 Million Payment to Its