CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
A manufacturer based in Germany expects to receive USD 10 million from a customer in six months and wants to remove the uncertainty about the euro value of that receipt. The company is most likely to:
The company would most likely sell USD forward against EUR. This fixes the euro value of the expected dollar receipt and removes currency uncertainty. An interest rate swap hedges interest rate exposure, which is unrelated to the foreign exchange risk on the receivable.
- Abuy a EUR call option on the dollar
- Bsell USD forward against EURCorrect
- Center a pay-fixed interest rate swap
Explanation
A USD receivable exposes the firm to a fall in the dollar. Selling USD forward locks in the euro proceeds. A pay-fixed interest rate swap addresses interest rate risk, not currency risk. The option choice is mis-specified and would not fix the rate.
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