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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

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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

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

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GarethMaster · Tutor for 5 years

Answer

True

Explain

## Step 1:<br />To solve this problem, we need to understand the natures of forwards, futures, and options.<br /><br />## Step 2:<br />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.<br /><br />## Step 3:<br />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.<br /><br />## Step 4:<br />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.<br /><br />## Conclusion:<br />From the insights offered above, it can classify that using forwards, futures, and options indeed hedge off foreign currency risk.
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