What is the most effective method to limit foreign exchange rate exposure for future trade payments?...

What is the most effective method to limit foreign exchange rate exposure for future trade payments? a. Floating transaction b. Forward transaction c. Short transaction d. Cross-currency transaction

Expert Solution

Option d:- Cross-currency transaction is the most effective method to limit foreign exchange rate exposure for future trade payments.

Reason:- Cross-currency transaction refers to the deploying of mutual currency pair of exchange rates. In order to undertake risk free future trade payments for investing in long-term investments. The developed economies like USA mostly use Currency Swaps concept to get more affordable loans to run the local trade by having upgrading appreciation value in its own exchange rate. For example when Euro currency and Dollar currency exchanged for the export activities with the base value of 10 million. Then the principal value of 1.25 million in return of interest rate. This maturity interest rate will safeguard the balance of payments rate for both the currencies. So the problem of deficiency in foreign exchange exposure for future trade payments will be solved very effectively.

Rahul Sunny answered 9 months ago

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