Exchange Rate Hedge Risk
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2. A U.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. The U.S. firm is at risk today of a loss if
A) the exchange rate changes to $2.00/£.
B) the exchange rate changes to $2.05/£.
C) the exchange rate doesn't change.
D) all of the above
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Solution Summary
Uses a hypothetical example to illustrate how business can use exchange rate swaps or forward contracts to hedge exchange rate risk.
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Answer= (A) The exchange rate falls to $2.00 per Pound Sterling.
100,000 (Pounds) = $203,000 at the current exchange rate. However, with the account ...
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