Question

A multi-national-corporation has payables in a foreign currency. Circle on the correct answer for each question.

(1) [ Long or Short ] in the foreign currency forward contract.

(2) [ Long or Short ] in the foreign currency futures contract.
(3) [ Borrow or Lend ] denominate in the foreign currency.

(4) [ Long or Short ] in the foreign currency [ Call or Put] option.

Answer 1

A payable in the foreign currency means that the foreign currency has to be purchased using domestic currency. Thus, the corporation must hedge against a depreciation of the domestic currency relative to the foreign currency.

1]

Long in the foreign currency forward contract

This is because by being long in the foreign currency forward contract, the price at which foreign currency is bought is locked in

2]

Long in the foreign currency futures contract

This is because by being long in the foreign currency futures contract, the price at which foreign currency is bought is locked in

3]

Lend denominate in the foreign currency

For a money market hedge of foreign currency payables, an amount of the present value of the foreign currency is deposited (lent) today at the foreign interest rate.

4]

Long in the foreign currency Call option

The corporation must hedge against a depreciation of the domestic currency relative to the foreign currency. This is achieved by buying a call option in the foreign currency because if the domestic currency depreciates relative to the foreign currency, the call option will gain