Hedging with Forward Contracts. Explain how a U.S. corporation could hedge net r

Question

Hedging with Forward Contracts. Explain how a U.S. corporation could hedge net receivables in Malaysian ringgit with a forward contract. Explain how a U.S. corporation could hedge payables in Canadian dollars with a forward contract.

A) The U.S. corporation could buy ringgit forward using a forward contract. The U.S. corporation could buy Canadian dollars forward using a forward contract.

B) The U.S. corporation could buy ringgit forward using a forward contract. The U.S. corporation could sell Canadian dollars forward using a forward contract.

C) The U.S. corporation could sell ringgit forward using a forward contract. The U.S. corporation could sell Canadian dollars forward using a forward contract.

D) The U.S. corporation could sell ringgit forward using a forward contract. The U.S. corporation could buy Canadian dollars forward using a forward contract.

Explanation / Answer

Answer : D) The U.S. corporation could sell ringgit forward using a forward contract. The U.S. corporation could buy Canadian dollars forward using a forward contract.

The U.S. Corporation could sell ringgit forward using a forward contract. This is accomplished by negotiating with a bank to provide the bank ringgit in exchange for dollars at a specified exchange rate (the forward rate) for a specified future date.

The U.S. Corporation could purchase Canadian dollars forward using a forward contract. This is accomplished by negotiating with a bank to provide the bank U.S. dollars in exchange for Canadian dollars at a specified exchange rate (the forward rate) for a specified future date.

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