Hedging Currency Risk Using Forward Contracts

Very Easy Multinational Operations Hedging Currency Risk

ABC Corporation, a U.S.-based company, operates a subsidiary in Europe. Due to the volatility of the Euro against the U.S. Dollar, ABC Corporation is concerned about potential losses arising from currency exchange rate fluctuations. As a strategy to hedge its currency risk, the company decides to use forward contracts to lock in the current exchange rate for future transactions.

Which of the following statements best describes the use of forward contracts in this scenario?

Forward contracts help eliminate all currency risk for ABC Corporation.

Forward contracts allow ABC Corporation to speculate on future currency movements.

Forward contracts provide a fixed exchange rate for future transactions, thereby minimizing currency risk.

Hint

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