FCAU will receive 1 million rand in six months. FCAU can hedge their exposure to the...

FCAU will receive 1 million rand in six months. FCAU can hedge their exposure to the rand by buying rand in the forward market.

True or False?

Expert Solution

FCAU will receive 1 million rand in 6 months. So, the exchange rate of Rand may fluctuate up or down against dollar. So, in order to offset it or to minimize the losses it needs to hedge its position.

Since FCAU will receive 1 million rand, the best option is it can enter into a forward contract to sell Rand at a specific price. So on the day FCAU receives 1 million Rand It will sell in the open market. the difference in the rates will be offset by the sell position made in the forward contract.

Example: If spot price is 1$ = 10 rand. It will receive 1,000,000 in 6 months. It entered into a forward contract to sell Rand let say $1 = 11 rand. On date of maturity let say spot rate 1$ = 8.50 rand. Then FCAU will sell the 1 million rand at 9 rand / $. So, if Rand exchange rate depreciates against dollar the loss will be offset by the sell position taken in the forward market.

The statement is False.

FCAU can hedge their exposure to the rand by selling rand in the forward market.

jeff jeffy answered 2 years ago

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