Question
The module team Question 5 One of the methods that can be used to hedge against foreign currency risk is Forward Rate Agreements (FRAs) True A False 3 pts
Answer
4.1
(232 Votes)
Francesca
Master · Tutor for 5 years
Answer
False
Explanation
## Step 1:In this problem, we're given the statement, "One of the methods that can be used to hedge against foreign currency risk is Forward Rate Agreements (FRAs)." The statement makes a claim about using Forward Rate Agreement as a way to mitigate the risks associated with foreign currency transactions.## Step 2:From available studies in financial markets, Forward Rate Agreement (FRA) is actually a tool used in the field of finance to manage interest rate risk, rather than foreign currency risk. It's an over-the-counter contract between parties who collectively wish to manage their future interest rate exposure. It is essentially an agreement on interest rate between the two parties.## Step 3:That's not to say, though, that firms can't use financial instruments to hedge against foreign currency risk. Instruments such as Futures Contracts, Forward Contracts, and Options can help mitigate foreign currency risks.Therefore, the statement in question which says FRA can be used to hedge foreign currency risk isn't entirely correct given how FRAs function.