Question

In hedging, the purchaser in the purchase commitment simultaneously enters into a contract in which it agrees to sell in the future:

a. the same quantity of the same goods at a fixed price.
b. a higher quantity of the same goods at a higher price.
c. a lower quantity of the same goods at a fixed price.
d. same quantity of different goods at a lower price.

Answer 1

In hedging, a purchaser typically agrees to sell the same quantity of the same goods at a fixed price in the future to lock in a value and protect against currency risk.

Step-by-step explanation:

In hedging, a strategy used by firms to protect themselves against the risk of fluctuating exchange rates, a purchaser enters into a financial contract.

This contract is a commitment to buy or sell a certain amount of currency at a stipulated rate in the future.

When creating a hedge, the purchaser generally enters into a contract agreeing to sell the same quantity of the same goods at a fixed price in the future, to ensure they know what the contract will be valued at, irrespective of market fluctuations.

Financial institutions or brokerage companies often handle these transactions, taking either a fee or creating a spread in the exchange rate as compensation for providing the service.