An American importer of English clothing has contracted
to pay an amount fixed in British pounds three months from now.
If the importer worries that the US dollar may depreciate sharply
against the British pound in the interim, it would be well advised
to

(a) The requirement is to identify how a company may
hedge exchange risk. Answer (a) is the correct answer because by
buying pounds today with a forward exchange contract, the firm
protects itself against depreciation in the value of the dollar in
relation to the pound. Answer (b) is incorrect because selling
pounds would put the firm in greater risk with respect to appreciation
of the pound. Answers (c) and (d) are incorrect because
buying and selling dollars would do nothing to hedge the value of
the pound.