Asked by george brown on Jun 01, 2024
Verified
RedFliers orders 50,000 pieces of steel rods from its supplier in Xonamba, priced at 1 Xon each, when the exchange rate is 0.60 Xon per dollar. Instead of paying the supplier immediately, RedFliers sells its dollars at the current rate and agrees to buy Xonamba's currency in 30 days at a fixed forward price. In this way, the company manages to lock in the price of the exchange, eliminating the risk from currency fluctuations in the future. This scenario exemplifies that RedFliers is involved in _____.
A) dollarization
B) random exchanges
C) FX swaps
D) loan-to-value trades
FX Swaps
The simultaneous purchase and sale of a given amount of currency at two different rates.
Currency Fluctuations
Variations in the exchange rate of one currency relative to another, affecting international trade and investment.
- Highlight the assortment of strategies employed by corporations to mitigate the effects of exchange rate changes.
Verified Answer
ZK
Zybrea KnightJun 06, 2024
Final Answer :
C
Explanation :
RedFliers is engaging in an FX swap, where it sells a currency (dollars) at the current exchange rate and agrees to buy it back (or another currency, in this case, Xonamba's currency) at a future date at a predetermined rate. This financial instrument is used to hedge against currency risk.
Learning Objectives
- Highlight the assortment of strategies employed by corporations to mitigate the effects of exchange rate changes.
Related questions
In the Context of Managing Exchange Rate Risks, When Companies ...
In the Context of Managing Exchange Rate Risks, Which of ...
In the Context of Managing Exchange Rate Risks, Which of ...
Both Fluctuating Exchange Rates and Deferred Payment Terms Are Necessary ...
The Purpose of Hedging in Forward Exchange Markets Is to ...