CFA Level I · CFA Level I Exam · Capital Flows and the FX Market
A corporation that needs to buy a foreign currency in three months at a rate fixed today is most likely to use which instrument to hedge the exchange rate risk?
A forward contract is the most appropriate hedge. It locks in today the exchange rate for a currency purchase in three months, removing uncertainty about the future spot rate, whereas a spot trade settles almost immediately and does not fix a future rate.
- AA spot transaction today
- BA forward contractCorrect
- CAn FX swap that exchanges only the spot leg
Explanation
A forward contract fixes the rate today for delivery on a future date, which matches the three-month need. A spot trade settles within days and would require holding the currency. A swap with only a spot leg is not a hedge for a future purchase.
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