You are an American importer with euro-payables in 6 months. To hedge, you would enter into what type of financial instrument?

• A. A currency option
• B. A euro forward (FX forward) contract
• C. A futures contract on the S&P 500
• D. A swap

Answer: (B)

Locking in the cost of a future euro liability is best done with a forward contract. An FX forward specifically fixes the exchange rate for a currency pair on a chosen future date, matching the exact amount and six-month timing of the euro payment you’ll owe. This eliminates exchange-rate uncertainty, so you know exactly how many USD you’ll need to pay in six months, regardless of how the euro moves in the meantime. For an American importer with a euro-denominated payable, the euro forward is the straightforward, cost-efficient hedge: it’s tailored to the specific payoff date and amount, with no up-front premium required like an option. A currency option would add flexibility but at a cost and is not as clean a hedge for a known liability; a futures contract on the S&P 500 hedges equity risk, not FX; a swap is more suited to longer-term or ongoing FX financing rather than a single six-month payoff.