Explanation:
A forward contract locks in an exchange rate for the future payment.
This removes exchange-rate uncertainty, but it does not guarantee the best possible outcome.
So the hedged outcome could be worse than the unhedged outcome.
Why the other choices are wrong:
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Q-138.5 A US-based importer knows it will need to pay EUR 10 million (Euros) to a European supplier in exactly three months. To hedge, the importer buys Euros in the three-month currency forward market. Which of the following is TRUE?
A
The hedged outcome must be better than the un-hedged outcome
B
The hedged outcome could be worse than the un-hedged outcome
C
The payoff with currency forwards is identical to the payoff with currency options
D
If markets are efficient, there is no logical reason to use the forward contract