Question

Currency futures can be used by MNCs to hedge payables. That is, an MNC would buy futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would:

A. Buy futures.
B. Sell futures.
C. Hold futures.
D. Exercise futures.

Answer 1

A speculator expecting a currency to appreciate would buy futures to potentially profit from the increase in value. This financial strategy is similar to how businesses hedge against currency fluctuations, though the intent differs as speculators aim for profit rather than stability.

Step-by-step explanation:

A speculator expecting a currency to appreciate would buy futures. Buying futures contracts allows the investor to lock in a price today for a transaction that will occur in the future, thus potentially profiting from an anticipated increase in the currency's value. If indeed the currency appreciates relative to others, the value of the futures contract would increase, allowing the speculator to sell it at a profit or settle it at a favorable exchange rate.

Businesses might use currency futures for hedging payables by buying futures. This strategy is utilized by multinational corporations (MNCs) as a form of financial protection against the volatility of exchange rates. A firm expecting to pay in foreign currency in the future can buy futures to lock in the price at the current rate, ensuring that the cost remains stable regardless of fluctuations in the currency markets.