A. Though this will settle the liability, it does not protect the company from the exchange rate risk. The exchange rate risk is the risk that the exchange rate will move in the wrong direction and require more of the local currency to settle the amount.
B. The firm will need to buy the foreign currency in the future so the do not need to sell foreign currency today.
C. Though this will settle the liability, it does not protect the company from the exchange rate risk. The exchange rate risk is the risk that the exchange rate will move in the wrong direction and require more of the local currency to settle the amount.
D. If a firm buys a forward contract, it is in a position to buy the foreign currency when it is needed in the future, but at the price specified today. Hence the firm's payables are covered by this fixed-cost foreign currency as they will know the amount of the domestic currency that will be required to settle the foreign currency denominated payable. This will eliminate the exchange rate risk of the rates moving in the wrong direction prior to the need for the foreign currency.
