Question

In order to minimize the foreign exchange exposure on a euro-denominated receivable due from a German company in 100 days, a British company would most likely initiate a:

a. Spot transaction.
b. Forward contract.
c. Real exchange rate contract.
d. Currency swap.

Answer 1

A British company would most likely initiate a forward contract to minimize foreign exchange exposure on a euro-denominated receivable due from a German company in 100 days.

Step-by-step explanation:

To minimize the foreign exchange exposure on a euro-denominated receivable due from a German company in 100 days, a British company would most likely initiate a forward contract.

A forward contract is a financial contract that allows parties to lock in an exchange rate for a future date, regardless of what the market exchange rate is at that time. By entering into a forward contract, the British company can ensure that it will receive a predetermined amount of pounds in exchange for the euros, eliminating the risk of exchange rate fluctuations.

Unlike a spot transaction, which involves the immediate exchange of currencies at the current market rate, a forward contract allows the company to hedge against potential losses caused by unfavorable exchange rate movements.