Final answer:
The forward rate is commonly used for hedging to protect against exchange rate fluctuations. Firms may use a forward contract to ensure they know the future value of an international transaction in their home currency.
Step-by-step explanation:
According to the text, the forward rate is commonly used for hedging. Hedging is a financial strategy employed by firms to protect themselves against potential losses due to fluctuating exchange rates. For example, a U.S. firm exporting to France and expecting to receive payment in euros may use a forward contract to fix the exchange rate for a future transaction. This ensures the firm knows the exact value of the contract in U.S. dollars one year from now, regardless of market fluctuations. Financial institutions or brokerage companies often facilitate these hedging contracts and may charge a fee or create a spread in the exchange rate for their services.