Explanation:
The company faces foreign exchange risk due to the potential depreciation of its functional currency (CAD) against the currency needed for the project (USD). The most standard and effective business strategy for locking in exchange rates and mitigating this foreign exchange risk is to enter a hedging position using currency futures or forwards.
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Q.83 A Canadian company harbors an ambitious plan to launch a project in the U.S. in twelve months. The company uses the Canadian dollar as the functional currency, and the project would most likely be executed in U.S. dollars. However, the company's top management is worried that the CAD will weaken against the USD in the months leading up to the beginning of the project, which might, in turn, increase the amount the company will have to pay for the project. As the company's risk manager, which of the following business strategies would work best regarding the foreign exchange risk?
A
Launching the project earlier than planned.
B
Take a hedging position in the form of a currency futures contract.
C
Advise the company to purchase stock index futures.
D
Pay for some upfront costs of the project immediately.
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