Which of the following completely eliminates transaction exposure? a. Index b. Currency option c. Forward d....

Which of the following completely eliminates transaction exposure?

a.	Index
b.	Currency option
c.	Forward
d.	Money market
e.	None of the above

Expert Solution

Correct Answer: Option C) Forward

Reasoning:

Transaction exposure is the level of uncertainty encountered by businesses involved in international trade. An example of such risk could depend on exchange rates and uncertainty caused by the calculation from the same. A hedging technique must be adopted to overcome such exposure.

The index is used to earn passive returns and cannot help companies to overcome such transaction exposure. Currency options can also be used to eliminate such risks as it provides hedgers to buy and sell options. However it doesn't completely eliminate the transaction exposure as asked in the question. A currency forward contract is an agreement between two parties to exchange a certain amount of a currency for another currency at a fixed exchange rate on a fixed future date. Such contracts are the best fit to totally eliminate transaction exposure. Money markets are short term instruments used to cover immediate illiquidity in the business.

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