Economics · Foreign Exchange Risk Management
Beta Co needs to manage its foreign currency risk on a large receipt expected in three months. The company operates in a country with a fixed exchange rate regime. Which statement is most accurate regarding the treasury manager's option to use a forward exchange contract?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Although the regime is fixed, risk remains due to potential official revaluations/devaluations, making a forward contract a valid tool to lock in the rate, though market spreads apply.✓
- 2The forward exchange contract guarantees complete protection without any counterpart risk or transaction cost.
- 3The contract is unsuitable because it locks the company into an interest rate rather than a specific exchange rate.
- 4A forward exchange contract is entirely redundant since fixed exchange rate regimes completely eliminate all real-world exchange rate adjustments or devaluations.
Correct answer
Although the regime is fixed, risk remains due to potential official revaluations/devaluations, making a forward contract a valid tool to lock in the rate, though market spreads apply.
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