Explain contingent exposure, Financial Management

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Explain contingent exposure and define the advantages of using currency options to manage this type of currency exposure.

Answer: Companies may come across a state where they may or may not face currency exposure. In this condition, companies need options, not obligations, to buy or sell a specific amount of foreign exchange they may or may not receive or should pay. If companies either hedge by using forward contracts or do not hedge at all, they may face specific currency exposure.

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