Question

Which of the following is probably NOT appropriate for an MNC wishing to reduce its exposure to British pound payables?

1) Purchase pounds forward.
2) Buy a pound futures contract.
3) Buy a pound put option.
4) Buy a pound call option.

Answer 1

Buying a pound call option is not appropriate for an MNC looking to hedge against the risk of the British pound depreciating when holding pound payables as it is a strategy used when expecting the currency to appreciate.

Step-by-step explanation:

When considering which of the following is probably NOT appropriate for an MNC wishing to reduce its exposure to British pound payables, we need to understand each financial instrument and its impact on currency risk management. Purchasing pounds forward, buying a pound futures contract, or buying a pound put option would all be strategies an MNC might use to hedge against the risk of the British pound depreciating. However, buying a pound call option would not be appropriate because a call option gives the holder the right to purchase a currency at a specified price; this is useful if expecting the pound to appreciate, not depreciate. Thus, for an MNC with pound payables, which will be cheaper to settle if the pound's value falls, securing the ability to pay at a higher rate in the future would not reduce risk but potentially increase costs.