The case of transaction exposure is described as follows. Choose the correct answer in the parenthesis in the description of the case. The choice is in bold letters.

My company (a U.S. company) bought a product from a German co., and purchasing department signed a contract to pay Euro 10,000 3 months later. The sales contract is delivered to my desk. I, a treasurer, am wondering how much USD my co. needs to pay the bill of Euro 10,000 3 months from now. The currency market is in turmoil, I need to use more USD when USD (strengthens/ weakens) against EUR in the next 3 months.

The market anticipates a weak USD. However, if USD (strengthens/ weakens) is more than the market expects, I will need more USD to pay the bill of EUR 10,000.

Is there any possibility to limit my USD payment to a certain level, or at a maximum? In that way, my USD payment will not get any higher even though USD slides more than the rate I can contract (buy EURO/sell EURO) now.

How and what kind of contracts are available now to protect/hedge my position of A/P of EUR 10,000? I understand that if USD (strengthens/ weakens) unexpectedly, I might regret hedging since I could use less USD for the payment of EUR 10,000.

Answer rating: 100% (QA)

In order to reduce the risk caused by certain foreign exchange holdings foreign currency hedging ent... View the full answer