Question

A company headquartered in Vancouver, British Columbia, is building a pipeline in Russia. The invoice amount is due in 90 days and is denominated at 28 million rubles. The Canadian dollar is trading for 28 rubles currently and 29 rubles 90 days forward.
Which of the following strategies will the Canadian firm most likely pursue in the 90-day forward market to hedge the transaction exposure inherent in this situation?

A. Purchase 28,000,000 rubles.
B. Purchase 29,000,000 rubles.
C. Sell 28,000,000 rubles.
D. Sell 29,000,000 rubles.

Answer 1

Answer:

C. Sell 28,000,000 rubles

Explanation:

By doing so, the company will immediately receive the amount equivalent in Canadian Dollars by selling 28 million rubles in forward and after 90 days when the invoice amount (28 million rubbles) is received from building the pipeline, will be used to netting of the forward contract.

In this way, company can hedge the currency exposure, and reduce the risk which can be generated from currency volatility.