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CFA Level 3
Derivatives & Currency Mgmt

Hedging Currency Risk with Forward Contracts

Medium Derivative Strategies Hedging Strategies

ABC Corporation is an international firm that generates significant revenue in both the US and Eurozone markets. Due to currency fluctuations, the company is concerned about the potential adverse impact on its cash flows resulting from a rising euro against the dollar over the next six months. To manage this risk, the company's CFO is considering a hedging strategy to protect against these fluctuations.

The CFO contemplates entering into a forward contract to sell euros at a predetermined rate. By doing so, ABC Corporation aims to secure its cash flows in USD regardless of future spot rate movements.

What would be the most suitable choice for ABC Corporation to hedge its exchange rate risk associated with its euro-denominated revenues?

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