Finance/Introduction to Corporate Finance
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3. Explain how a firm's management can limit risk exposure through using a forward contract. What types of forward contracts are available?
5. How do managers use futures contracts to limit risk exposure?
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Solution Summary
This solution explains how a firm's management can limit risk exposure through using a forward contract.
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3. Explain how a firm's management can limit risk exposure through using a forward contract. What types of forward contracts are available?
Forward contracts can reduce a firm's translation exposure by creating an offsetting asset or liability in the foreign currency. Thus by forward contract one can buy or sell the currency at a certain time in future at a certain price. This can reduce the risk. Type of forward contracts are available are buying or selling the forward. Examples:
Forward Market Hedge
In a forward market hedge, a company that is long a foreign currency will sell the foreign currency forward, whereas a company that is short a foreign currency will buy the currency forward. In this way, the company can fix the dollar value of future foreign ...
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