Impact of Currency Forward Hedge on Financial Performance

Easy Currency Management Currency Hedging

XYZ Corporation, a US-based multinational company, generates a significant portion of its revenue from sales in Europe. With the euro experiencing volatility against the US dollar, XYZ Corporation's management is concerned about potential losses from currency fluctuations affecting its cash flows. To mitigate this risk, the management is considering using currency forwards as a hedging strategy.

Which of the following correctly describes the impact of using a currency forward hedge on XYZ Corporation's financial performance?

Using a currency forward will completely eliminate currency risk, ensuring stable cash flows regardless of market fluctuations.

The forward contract locks in the exchange rate, allowing XYZ Corporation to have a predictable cash flow in USD, thereby reducing the risk of currency fluctuations.

Currency forwards are like options and give the company the right, but not the obligation, to exchange currencies at a certain rate.

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