A US-based exporter expects to receive €1,000,000 in 3 months. The current spot rate is $1.10/€. The exporter is concerned the Euro will depreciate. Which hedging strategy would BEST mitigate this risk?

Answer options:

Buy Euro call options.

Enter into a forward contract to buy Euros.

Enter into a forward contract to sell Euros.

Do nothing, as currency fluctuations average out over time.

How to approach this question

Identify the exposure: Long Asset (Receivable). Hedge with Short Instrument (Sell Forward or Buy Put).

Full Answer

C.Enter into a forward contract to sell Euros.✓ Correct

The exporter has a long position (receivable). To hedge, they should take a short position (sell forward). If the Euro drops, the gain on the forward contract offsets the loss on the receivable.

Common mistakes

Buying calls instead of puts; buying forwards instead of selling.

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