Which one of the following is a suggested method of reducing a U. S. importer's short-run exposure to exchange rate risk? Group of answer choices Entering a forward exchange agreement timed to match the invoice date Investing U. S. dollars when an order is placed and using the investment proceeds to pay the invoice

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Business

Yareli Weaver

3 February, 20:28

Which one of the following is a suggested method of reducing a U. S. importer's short-run exposure to exchange rate risk? Group of answer choices Entering a forward exchange agreement timed to match the invoice date Investing U. S. dollars when an order is placed and using the investment proceeds to pay the invoice

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Magnolia · Answer 1

Entering a forward exchange agreement timed to match the invoice date

Explanation:

A forward exchange agreement is a special type of foreign currency transaction between two parties to exchange two designated currencies at a specific time in the future. These agreements usually takes place on a date after the date in which the spot contract settles and are used to protect the buyer from any flunctuations in currency prices.

For a US's importer's short-run exposure to exchange rate risk to be reduced, such importer should arrange and enter into a forward exchange agreement where the contract and the invoices will be in their own currency at a specified date in the future. This will protect the importer from unexpected or adverse movements in the currencies future spot rate and shift all exchange risk from the importer on to other parties. The person who will now bear the risk will be a matter of negotiation, along with price and other payment terms.