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- This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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- October 13, 2017 at 6:31 pm #410835
Edted plc has to pay a Spanish supplier 100,000 euros in three months’ time. The company’s finance director wishes to avoid exchange rate exposure and is looking at four options
1) Do nothing for three months and then buy at the spot rate
2) Pay in full now, buying euros today at the spot rate
3) Buy euros now put them on deposit for three months and pay the debt with these euros plus accumulated interest
4) Arrange a forward exchange contract to buy the euros in three months’ timeWhich of the options would provide cover against the exchange rate exposure that Edted would otherwise suffer?
A. Option 4 only
B. Options 3 and 4 only
C. Options 2, 3 and 4
D. All optionsShouldn’t the answer be all as statement one is considered as lagging?
October 13, 2017 at 6:49 pm #410846No. Lagging is when we pay later than the due date because we think the exchange rate will move in our favour.
Simply paying on the due date at whatever the spot rate happens to be is not taking any action at all to avoid exchange rate risk.October 14, 2017 at 11:56 am #410921Thank you! I understand now
October 14, 2017 at 4:50 pm #410983You are welcome 🙂
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