A US-based exporter expects to receive €1,000,000 in three months. The current spot rate is $1.10/€. The exporter is concerned that the Euro might depreciate against the Dollar. Which of the following hedging strategies is MOST appropriate to mitigate this risk?

Answer options:

Buy Euro call options.

Enter into a forward contract to sell Euros.

Enter into a forward contract to buy Euros.

Do nothing, as currency fluctuations will average out.

How to approach this question

Identify the exposure: Receivable = Long position (you have the foreign currency). Hedge: Short position (sell the foreign currency).

Full Answer

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

The exporter has a receivable in Euros. If the Euro weakens (depreciates), they receive fewer Dollars. To lock in the rate, they should agree to SELL Euros at a fixed rate in the future (Forward Contract to Sell). Alternatively, they could buy Put options (right to sell).

Common mistakes

Confusing buy/sell direction; confusing call/put options.

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