Final answer:
Commodities are used to hedge against currency risk, especially in international transactions where exchange rates are volatile. Hedging contracts and commodity-backed currencies provide protection against exchange rate movements. The correct option is D.
Step-by-step explanation:
Commodities, such as gold, coins, and futures, are a great way to hedge against currency risk. This is because many firms try to protect themselves from the volatility of currency exchange rates affecting their international transactions.
For example, a U.S. firm that is exporting to France and will receive payment in euros has to be wary of the dollar/euro exchange rate fluctuations. The firm can enter into hedging contracts to guarantee a certain exchange rate, allowing them to know exactly what their contract will be worth in U.S. dollars a year from now, regardless of market rates. This protects the firm if the value of the euro declines relative to the dollar.
Additionally, commodity-backed currencies provide a layer of stability as the currency values are backed up by physical commodities like gold or silver, which have been a traditional hedge against inflation and currency devaluation.
Hence, Option D is correct.