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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?
No. 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.
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