Question

In this course, you learned various techniques to hedge a multinational company's exposures. Suppose ABC Inc. has a $1,000,000 account receivable from its clients in the UK in 1 month. How can it hedge its cash flows? Please explain all possible hedging strategies ABC Inc. can use to protect its account receivable from the UK with examples.

Answer 1

First option:

Enter into a forward contract with a bank or financial institution. It is like an agreement to sell EURO receivable to bank in one month for an agreed exchange rate.

Second option:

Enter into a futures contract in an exchange. It is like an agreement to sell EURO receivable in one month for an agreed exchange rate.

Third option:

Buy put option on EURO which gives you the right to sell EURO for a minimum exchange rate in one month. Since, it is an option it can be exercised if provides favorable result.

Fourth option:

Take a loan in EURO for a month whose interest plus principal in month equal to amount of receivable in one month. This way firm can have cash inflow today and no inflow or outflow in one month.