General Securities Representative (Series 7) Practice Exam

What is one method a businessperson can use to protect a payment in a foreign currency due in 30-60 days?

1. Buy futures on the currency

2. Buy puts on the foreign currency

3. Invest in foreign stocks

4. Hedge with commodities

The correct answer is: Buy puts on the foreign currency

The most effective method for a businessperson to protect a payment due in a foreign currency within a 30-60 day time frame is by purchasing puts on the foreign currency. By buying puts, the businessperson secures the right, but not the obligation, to sell the foreign currency at a specific price within a designated period. This strategy provides a way to limit losses caused by adverse currency movements, as it allows the businessperson to set a floor on the exchange rate they will receive when converting currency at the time of payment. This approach is particularly beneficial in a volatile foreign exchange market where currency values can fluctuate significantly. If the value of the foreign currency decreases, the puts can be exercised to sell at a higher predetermined rate, effectively protecting the business from unfavorable currency shifts. Other methods, such as buying futures on the currency, while also a hedge against movement in exchange rates, require more complex management and may not align as directly with the company’s cash flow timing as puts do. Similarly, investing in foreign stocks or hedging with commodities does not directly address the specific risk of currency fluctuations related to imminent payments. These options could expose the business to additional risks and do not provide the same level of direct protection against currency depreciation.