Final answer:
The American who agrees to pay 100 Euros in the future bears the currency fluctuation risk. To mitigate this risk, they can use a hedging strategy, which involves locking in an exchange rate for a fee.
Step-by-step explanation:
If you are an American and agree to pay 100 Euro to another person in 6 months, you bear the currency fluctuation risk. This is because you will ultimately need to convert US dollars into Euros to make the payment, and if the value of the Euro increases relative to the US dollar, you will have to spend more US dollars to meet the original 100 Euro obligation.
Companies often use financial transactions called hedging to protect against such risks, which allows them to lock in an exchange rate for a fee, ensuring that they know exactly what an international contract will be worth. If you do not hedge, you accept the risk that the value of the Euro in US dollars can fluctuate, which may be detrimental or beneficial to you depending on the direction of the currency's movement. Financial institutions usually facilitate hedging with a fee or by creating a spread in the exchange rate.