In the face of unpredictable exchange rate movements, a firm should pu

QUESTION

In the face of unpredictable exchange rate movements, a firm should pursue strategies that reduce its economic exposure.

Indicate whether the statement is true or false.

ANSWER

TRUE
The forward market tends to offer coverage for exchange rate changes a few months—not years—ahead. Given this, it makes sense to pursue strategies that will increase the company’s strategic flexibility in the face of unpredictable exchange rate movements—that is, to pursue strategies that reduce the economic exposure of the firm.