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    Question

    A firm is importing machinery worth $100,000. The

    current spot rate is ₹82/USD and the forward rate for 3 months is ₹83/USD. Which is the better strategy for managing currency risk?
    A Go with spot market Correct Answer Incorrect Answer
    B Use forward contract at ₹83/USD Correct Answer Incorrect Answer
    C Wait for rupee appreciation Correct Answer Incorrect Answer
    D Borrow in USD Correct Answer Incorrect Answer
    E Use currency options with strike at ₹84 Correct Answer Incorrect Answer

    Solution

    Forward contracts help lock the exchange rate, thus reducing currency risk. Since depreciation of INR is expected (₹83 in 3 months), buying forward fixes cost now.

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