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) Sell futures
b) Buy futures
c) Hold futures
d) Ignore futures

Answer 1

An MNC uses currency futures to hedge against exchange rate fluctuations, while a speculator expecting a currency to appreciate would buy futures to potentially profit from this appreciation.

Step-by-step explanation:

Currency futures are financial instruments that can be used by multinational corporations (MNCs) to hedge payables or for speculation. An MNC would buy futures to hedge a foreign payable position, ensuring a set exchange rate for future transactions. Speculators, on the other hand, use currency futures to bet on currency movements.

If a speculator is expecting a currency to appreciate, they would choose to buy futures. Buying futures contracts allows the speculator to lock in a purchase price for a currency that they expect to increase in value, positioning them to potentially make a profit on this appreciation. In contrast, selling futures would be indicative of an expectation that the currency's value will decline.