Hedging Currency Risk with Forward Contracts

Very Easy Multinational Operations Hedging Currency Risk

ABC Corporation operates internationally and engages in several transactions in various currencies. The company is concerned about the potential fluctuations in exchange rates affecting its foreign revenue and expenses. To mitigate these risks, ABC Corporation has decided to employ hedging strategies.

Which of the following strategies is the most suitable for ABC Corporation to hedge against potential currency risk arising from expected receipts in a foreign currency?

Entering into a forward contract to sell the foreign currency at a predetermined rate.

Investing in local equities of the foreign country.

Holding the foreign currency in a bank account to wait for favorable exchange rates.

Hint

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