Currencies – U.S. dollar foreign-exchange rates. May 5, 2011 Country/currency………
ID: 2736168 • Letter: C
Question
Currencies – U.S. dollar foreign-exchange rates. May 5, 2011 Country/currency………….in US$............per US$ British Pound………………..1.5347…………….0.6516 Norwegian Kroner………..0.1690…………….5.9173 Thai Baht……………………….0.0310……………32.250 Mr. Charles imports light bulbs from Norway to the United States. He has a contract to purchase from a Norwegian firm 10,000 light bulbs that he plans to sell in Chicago in 30 days. Assuming that futures trading exists between U.S. dollars and Norwegian Kroner, how can Mr. Charles use such a market to hedge foreign currency risk?
a. Futures contracts cannot be used to hedge in this circumstance
b. Contract to sell US Dollars at an agreed upon price in 30 days
c. Contract to buy Kroner at an agreed upon price in 30 days
d. Contract to sell Kroner at an agreed upon price in 30 days e. Contract to buy US Dollars at an agreed upon price in 30 days
Explanation / Answer
As Mr.Charles is an importer he liability is to pay in US $. Therefore he has to hedge for US $ by using forward rate to hedge for external flutuation risk....
The answer is option d.Contract to sell Kroner at an agreed upon price in 30 days e. Contract to buy US Dollars at an agreed upon price in 30 days
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