If a company takes out a forward exchange contract,which of the following is correct?
A) At the maturity date, the company can pay either the forward rate that was contracted or the then-current rate.
B) Taking out a forward exchange contract is always cheaper than waiting to pay spot rates.
C) Paying the spot price is safer than taking out a forward exchange cover.
D) The company's cost is locked in from the beginning of the contract, regardless of market changes.

Question

Quizplus · Accepted Answer

When a company takes out a forward exchange contract, the company's cost is locked in from the beginning of the contract, regardless of market changes. This provides certainty for the company in terms of their future costs and can be helpful in managing risk. The other options are not correct - A is incorrect as the company is obliged to pay the contracted forward rate at the maturity date, regardless of the then-current rate; B is incorrect as it depends on market conditions whether a forward exchange contract is cheaper or more expensive than waiting to pay spot rates; and C is incorrect as paying the spot price exposes the company to exchange rate risk, whereas taking out a forward exchange cover can reduce this risk.

If a Company Takes Out a Forward Exchange Contract,which of the Following