Question

a company anticipates that it will make a sale denominated in foreign currency to a regular foreign customer in six months. even though the customer has not yet placed an order, the company acquires an option to sell the foreign currency when it is expected to be received. the option is a hedge of a(n)______

Answer 1

The company is hedging to protect against currency risk by acquiring an option that allows it to sell foreign currency at a predetermined rate, thereby securing the value of a future foreign currency transaction.

Step-by-step explanation:

The company is engaging in hedging to protect itself against potential currency risk associated with an anticipated future transaction. By acquiring an option to sell foreign currency when it is expected to be received, the company is using a financial transaction to lock in an exchange rate and mitigate the risk of exchange rate fluctuations.

In this scenario, the company is unsure of the future value of the foreign currency relative to its own, which can impact the value of the sale when converted to its domestic currency. Through hedging, the company can pay a fee for an option contract that will allow it to sell the foreign currency at a predetermined rate, protecting its interests should the value of the foreign currency decline against its own.