Answer: A US-based manufacturing company that is scheduled to make a large payment in euros in 1 year purchases a 1-year forward contract for the same euro amount.

**D is correct.** This is an example of hedging. A US-based manufacturing company that needs to make a large payment in euros in 1 year is exposed to currency risk (euro appreciation). By purchasing a 1-year forward contract for the same euro amount, the company locks in the exchange rate today, eliminating the uncertainty about future euro costs. This is a classic hedging strategy where a company uses derivatives to reduce exposure to price movements in an underlying asset. **A is incorrect.** This is an example of speculation. A soybean farmer who is naturally long soybeans from farming operations should sell call options or use short positions in forwards/futures to hedge the price they will receive for their output. Buying call options would increase their long exposure rather than hedge it. **B is incorrect.** This is an example of speculation. The trader does not own the underlying commodity and is taking a position based on their belief about future price movements, without any existing exposure to hedge. **C is incorrect.** This is an example of arbitrage. The trader is exploiting a pricing discrepancy between the forward price and the spot price with borrowing, which represents a risk-free profit opportunity through arbitrage. **Learning Objective:** Differentiate among the broad categories of traders: hedgers, speculators, and arbitrageurs. **Reference:** Global Association of Risk Professionals, Financial Markets and Products (New York, NY: Pearson). Chapter 4. Introduction to Derivatives

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