Question

1. Under what circumstance would a company seek to hedge its receivables or payables?

Answer 1

Company would seek to hedge its payable or receivable when they are in foreign currency. For example if a USA firm deals with a japanese company in sales and purchase transaction, then they will have to deal in Japanese YEN. There furture receivables and payables amount will change based on the exchange rate between $ and YEN, thus they need to hedge the same for reduced volatality.

Payable can also be in the form of interest payments on loan, which could be based on fuctuating rates. (LIBOR).

In such case too, the company will hedge its payable to have a fixed payment and reduce volatility.