Question

Which of the following is probably NOT an example of the use of forward contracts by an MNC?

1) hedging pound payables by selling pounds forward
2) hedging peso receivables by selling pesos forward
3) hedging yen payables by purchasing yen forward
4) hedging peso payables by purchasing pesos forward
5) All of these are examples of using forward contracts.

Answer 1

The option that is probably NOT an example of the use of forward contracts by an MNC is option 4) hedging peso payables by purchasing pesos forward.

Step-by-step explanation:

The option that is probably NOT an example of the use of forward contracts by an MNC is option 4) hedging peso payables by purchasing pesos forward.

A forward contract is a financial transaction used to protect against currency risk. In the case of an MNC (Multinational Corporation), they would use forward contracts to hedge against potential losses due to fluctuations in exchange rates when dealing with foreign currencies.

In the given scenario, options 1, 2, and 3 are all examples of hedging with forward contracts as they involve using the contracts to protect against potential losses in pound payables, peso receivables, and yen payables respectively. However, option 4 involves purchasing pesos forward to hedge against peso payables, which is not in line with the purpose of a forward contract. Instead, an MNC would sell pesos forward to hedge against potential losses in peso payables.

Therefore, option 4) hedging peso payables by purchasing pesos forward is probably NOT an example of the use of forward contracts by an MNC.