Using Forward Contracts The Moller Company is involved in global operations. A footnote in its 2000 financial report includes the following statement: “The Moller Company uses forward and option contracts to hedge its exposure to fluctuations in foreign currency rates. At year-end, contract commitments and balance sheet exposures were hedged with forward contracts.”

a. Identify an example of a contract commitment that would have an exposure to fluctuating foreign currency rates.

b. Describe how a balance sheet asset exposure can be hedged with forward contracts.

c. What is the potential risk of a balance sheet liability exposure in a time of fluctuating exchange rates? Why would this exposure influence your evaluation of the company?

Would the country in which the liability exists influence your decision?