Explanation:
The company's primary concern is the potential depreciation of the euro against the US dollar, given its receivables in euros and payables in US dollars. To hedge against this risk, the risk manager should consider purchasing a currency option that provides the right (but not the obligation) to sell euros and buy US dollars at a predetermined exchange rate. This strategy offers protection against unfavorable currency movements while still allowing the company to benefit from any favorable currency movements. Currency options provide a level of flexibility that is particularly useful in volatile currency markets. If the euro appreciates against the US dollar, the company can choose not to exercise the option and instead convert its euros at the more favorable current market rate. Conversely, if the euro depreciates against the US dollar, the company can exercise the option and convert its euros at the predetermined rate, thereby avoiding a larger loss.
Q.5359 A risk manager at a multinational corporation is analyzing the currency exposure of the company's European operations. The company has receivables in euros, payables in US dollars, and a subsidiary in Germany that has both euro-denominated assets and liabilities. Which of the following is the most appropriate hedging strategy to manage this currency risk?
A
Buying a currency option that gives the right to sell euros and buy US dollars at a predetermined exchange rate.
B
Buying a currency option that gives the right to buy euros and sell US dollars at a predetermined exchange rate.
C
Entering into a forward contract to sell euros and buy US dollars at a predetermined exchange rate.
D
Entering into a forward contract to buy euros and sell US dollars at a predetermined exchange rate.
No comments yet.