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All main topics / Finance & Investment / Derivatives / Derivatives
17
A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true
A.A forward contract can be used to lock in the exchange rate
B.A forward contract will always give a better outcome than an option
C.An option will always give a better outcome than a forward contract
D.An option can be used to lock in the exchange rate
Answer: A
A forward contract ensures that the effective exchange rate will equal the current  forward exchange rate. An option provides insurance that the exchange rate will not be worse than a certain level, but requires an upfront premium. Options sometimes give a better outcome and sometimes give a worse outcome than forwards.
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Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015

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