Question

J.C. Kim (JCK) Inc. (a major Cincinnati-area exporter of canned chili) expects to receive a payment of EUR 25,000 one year from now. Which of the following statements is true?

S1: JCK Inc. has a natural short position to the EUR. This would lead to a positive FX transaction exposure.

S2: To fully hedge its FX transaction exposure, JCK Inc. needs a long forward EUR 25,000 contract.

  

S2 is correct but S1 is false

Both statements are false

S1 is correct and S2 is false

Both statements are correct

Answer 1

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Answer:

Natural short position in EUR means that the company naturally or mostly sells EUR.

Explanation:

The exported shall receive EUR 25,000 after a year. He has to sell them in order to get USD.

So, the statement "S1: JCK Inc. has a natural short position to the EUR. This would lead to a positive FX transaction exposure." is correct.

Long forward contract means the company needs to buy EUR in the future. But in this case, the company has to sell EUR in future, so the company needs Short forward contract to fully hedge its FX transaction exposure.

So, the statement "S2: To fully hedge its FX transaction exposure, JCK Inc. needs a long forward EUR 25,000 contract." is false.

Hence, the correct answer is C) S1 is correct and S2 is false