Question

A multi-national-corporation has receivables 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 receivable in the foreign currency means that the foreign currency will be converted into domestic currency. Thus, the corporation must hedge against an appreciation of the domestic currency relative to the foreign currency.

1]

Short in the foreign currency forward contract

This is because by being short in the foreign currency forward contract, the price at which foreign currency is converted into domestic currency is locked in

2]

Short in the foreign currency futures contract

This is because by being short in the foreign currency futures contract, the price at which foreign currency is converted into domestic currency is locked in

3]

Borrow denominate in the foreign currency

For a money market hedge of foreign currency receivables, an amount of the present value of the foreign currency receipt is borrowed today at the foreign interest rate.

4]

Long in the foreign currency Put option

The corporation must hedge against an appreciation of the domestic currency relative to the foreign currency. This is achieved by buying a put option in the foreign currency because if the domestic currency appreciates relative to the foreign currency, the put option will gain