Final answer:
It is true that foreign currency denominated marketable securities can be used to hedge against currency fluctuations. Hedging involves using financial contracts to fix future exchange rates, providing protection against currency risk, but at the cost of a fee, which may be unnecessary if the currency value increases.
Step-by-step explanation:
Foreign currency denominated marketable securities can indeed be used to hedge a commitment or anticipated future transaction; this is true. A hedge is a financial strategy that involves undertaking a financial transaction to protect against the risk of currency fluctuations. In the context of international trade, firms often hedge to lock in an exchange rate for a future transaction. This ensures that the value of their future cash flows in their home currency remains predictable despite any potential movements in the foreign exchange market.
By engaging in a hedging contract, a firm can pay a fee to guarantee a specific exchange rate at a future date, irrespective of the market exchange rate at that time. This provides protection against the risk that the foreign currency will be worth less in their home currency, known as currency risk. However, if the foreign currency appreciates, the firm may have paid the hedging cost without any benefit. To facilitate hedging, financial institutions or brokerage companies often handle these transactions, charging a fee or creating a spread in the exchange rate as compensation for the service provided.