Describe how you would use the spot and forward markets to manage the potential exchange rate risk between the countries from which you import (buy) components and the countries in which you sell auto parts.
The spot market is a type of foreign exchange transaction that occurs simultaneously between two parties at an agreed-upon rate on a given date. In this case, it can be used by companies that need to purchase components from international suppliers as payments made via spot transactions for these imports will help them hedge against any sudden changes in market rates. For example, if a company needs to buy iron rods from China for $1000 now but expects the Chinese yuan to depreciate significantly in one month’s time, they could make their purchase via a spot transaction today and lock in their converted rate before it drops too low.
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