Question
Question 23 Forwards, futures and options are examples of derivatives that can be used to hedge against foreign currency risk exposure. True False 3 p
Answer
4.6
(229 Votes)
Gareth
Master · Tutor for 5 years
Answer
True
Explanation
## Step 1:To solve this problem, we need to understand the natures of forwards, futures, and options.## Step 2:A forward contract is a non-standardized contract between two parties to purchase or sell a foreign currency at a pre-determined rate in the future, thereby minimizing the risk of unfavorable exchange rate movements.## Step 3:Similar to a forward contract, a futures contract is standardized and is traded on an organized exchange. And provide us with stability in currencies' pricing, thus, safeguarding against foreign currency risk exposure.## Step 4:An option contract gives a right, but it is not an obligation, to the holder of the option to buy or sell a certain foreign currency at a specified rate at any time before the date of maturity. This contract also serves as a source of protection against possible unfavorable fluctuations in foreign exchange.## Conclusion:From the insights offered above, it can classify that using forwards, futures, and options indeed hedge off foreign currency risk.