Question

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.

Answer 1

A forward contract is a hedging method used to reduce the exchange risk. It is a contract which entered between parties regarding trading of asset at a future date.

a US corporation who has  net receivables in Malaysian ringgit can use a forward contract to hedge .Since the US corporation has Malaysian ringgit receivable it is afraid of reduction the in value of Malaysian ringgit and increase in value of $. They can enter into a forward contract to sell Malaysian ringgit at a future price and there by reduce the loss on exchage rate fluctuation.

Similarly when US corporation who has   payables in Canadian dollars, They afraid of reduction in value of $ and increase in value of Canadian dollars.  They can use a forward contract to buy Canadian dollars at a future price and there by reduce the loss on exchage rate fluctuation.