Which of the following is correct when contracting ahead in the forward exchange market?
A) At contract close you pay either the forward rate that was contracted or the then-current rate.
B) Contracting ahead is always cheaper than waiting to pay spot rates.
C) Your cost is locked in from the beginning of the contract, regardless of market changes.
D) Paying the spot price is safer than contracting forward.

Question

Quizplus · Accepted Answer

When contracting ahead in the forward exchange market, your cost is locked in from the beginning of the contract, regardless of market changes. This means that even if the exchange rate changes in the future, you will still pay the rate that was contracted at the beginning of the agreement. Option A is incorrect because at contract close, you only pay the forward rate that was contracted, not the then-current rate. Option B is incorrect because the cost of contracting ahead may be more expensive than waiting to pay spot rates, depending on the market conditions. Option D is incorrect because contracting forward provides certainty and protection against fluctuating exchange rates, which may be riskier than paying spot rates.

Which of the Following Is Correct When Contracting Ahead in the Forward