Question

MNCs typically prefer to hedge exchange rate risk because A. MNCs are typically well diversified across numerous currencies. B. Creditors prefer MNCs that maintain low exposure to exchange rate risk. C. International Fisher effect (IFE) does not hold very well. D. MNCs can increase the volatility in their earnings overtime by hedging exchange rate risk. E. Corporate managers prefer to restructure the firm often.

Answer 1

MNCs typically prefer to hedge exchange rate risk because, Hedging against exchange rate changes can reduce the uncertainty of future cash flows that the company can expect to receive in the near future. Through hedging the company can stabilise it's earnings and other expenses to be incurred. Also the creditors of the company want them to maintain low exposure to exchange rate risk.

So, the correct answer is option (b) that Creditors prefer MNCs that maintain low exposure to exchange rate risk

Hope I am able to solve your concern. If you are satisfied hit a thumbs up !!