Final answer:
To hedge the exchange rate risk, the U.S. firm can enter into a forward contract to fix the exchange rate for the repatriation of their assets.
Step-by-step explanation:
To hedge the exchange rate risk of repatriating £50 million in assets from Britain to the U.S., the U.S. firm can enter into a forward contract. A forward contract is a financial agreement between two parties to exchange currencies at a specified exchange rate at a future date. By entering into a forward contract, the U.S. firm can lock in a specific exchange rate, mitigating the risk of unfavorable exchange rate fluctuations when the repatriation occurs.
For example, if the U.S. firm expects the exchange rate to decrease in the future, it can enter into a forward contract to sell British pounds at the current exchange rate, effectively fixing the exchange rate for the repatriation of its assets. This would protect the U.S. firm from potential losses if the exchange rate were to decrease.
On the other hand, if the U.S. firm expects the exchange rate to increase, it can enter into a forward contract to buy British pounds at the current exchange rate. This would allow them to repatriate their assets at a more favorable exchange rate, potentially resulting in a profit.