Question

To avoid risk, a buyer can:

1) hedge in a commodities market.
2) require bid or performance bonds.
3) decide not to do business in certain countries.
4) a and b.
5) a, b, and c.

Answer 1

A buyer can avoid risk by hedging in commodities markets, requiring bid or performance bonds, or deciding not to do business in certain volatile countries. These strategies are designed to protect against currency risks and contractual non-performance.

Step-by-step explanation:

To avoid risk, a buyer can take several actions:

1. Hedge in a commodities market.
2. Require bid or performance bonds.
3. Decide not to do business in certain countries.

When a firm enters a contract that involves receiving or paying in a foreign currency, there is a risk that currency fluctuations could affect the value of that transaction. To protect against this, the firm can use hedging as a mechanism to lock in a specific exchange rate for the future, ensuring stability regardless of market fluctuations. Additionally, buyers can reduce risk through mechanisms like bid or performance bonds, which provide a form of insurance against contractual non-performance. Lastly, avoiding business in countries with unstable economic or political climates can minimize exposure to risks associated with those environments.