Effective Hedging Strategy for ABC Corporation

Very Hard Multinational Operations Hedging Currency Risk

ABC Corporation is a US-based company with significant operations in Europe. It generates approximately €60 million in revenue annually from its European operations. The current exchange rate is 1 USD = 0.85 EUR. Recently, the company has observed volatility in the exchange rates, which has raised concerns about the potential impact on its dollar-denominated income. To manage this exposure, ABC Corporation decides to consider several strategies for hedging its currency risk.

Which of the following hedging strategies would be the most effective for ABC Corporation to lock in its expected future revenues at a predetermined exchange rate?

Enter into a forward contract to sell €60 million at the current exchange rate of 0.85 EUR/USD.

Invest in a currency swap to exchange a notional amount at the spot rate while retaining exposure to the currency fluctuations.

Purchase a currency option giving the right, but not the obligation, to sell €60 million at a specified strike price.

Hint

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