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FRM Part I · FRM Exam Part I · How Do Firms Manage Financial Risk?

A US-based exporter expects to receive EUR 5,000,000 in six months and wants to remove the risk that the euro will weaken against the dollar. Which hedging position best achieves this objective using forward contracts?

The exporter should sell EUR 5,000,000 forward against USD. It will receive euros, so it is naturally long the currency and is hurt by euro depreciation. A short forward locks in the exchange rate today, whereas buying euros forward would increase the exposure.

  1. ABuy EUR 5,000,000 forward against USD
  2. BSell EUR 5,000,000 forward against USDCorrect
  3. CBuy USD 5,000,000 forward against EUR
  4. DEnter a long euro futures position of any size

Explanation

The exporter holds a future euro inflow, so it is long euros and loses if the euro depreciates. Selling EUR forward fixes the dollar value of the receipt. Buying euros forward would double the exposure instead of offsetting it.

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