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Should An MNC Risk Over Hedging Point Yes Mncs Have

MNCs should attempt to forecast and hedge their minimum expected unanticipated net cash flows in foreign currencies on a monthly basis. While it is impossible to predict the exact daily amounts, estimating monthly volumes based on past data can help MNCs hedge at least their lowest expected levels. However, overhedging unanticipated transactions exposes MNCs to exchange rate risk if they hedge more than actual net cash flows, since they will be affected if the currency increases in value. The optimal approach is to hedge minimum expected needs but not overhedge unanticipated transaction volumes.

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Amit Pandey
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77 views1 page

Should An MNC Risk Over Hedging Point Yes Mncs Have

MNCs should attempt to forecast and hedge their minimum expected unanticipated net cash flows in foreign currencies on a monthly basis. While it is impossible to predict the exact daily amounts, estimating monthly volumes based on past data can help MNCs hedge at least their lowest expected levels. However, overhedging unanticipated transactions exposes MNCs to exchange rate risk if they hedge more than actual net cash flows, since they will be affected if the currency increases in value. The optimal approach is to hedge minimum expected needs but not overhedge unanticipated transaction volumes.

Uploaded by

Amit Pandey
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Solved: Should an MNC Risk Over hedging Point Yes MNCs

have

Should an MNC Risk Over hedging?


Point Yes. MNCs have some “unanticipated” transactions that occur without any advance
notice. They should attempt to forecast the net cash flows in each currency due to unanticipated
transactions based on the previous net cash flows for that currency in a previous period. Even
though it would be impossible to forecast the volume of these unanticipated transactions per
day, it may be possible to forecast the volume on a monthly basis. For example, if an MNC has
net cash flows between 3 million and 4 million Philippine pesos every month, it may presume
that it will receive at least 3 million pesos in each of the next few months unless conditions
change. Thus, it can hedge a position of 3 million in pesos by selling that amount of pesos
forward or buying put options on that amount of pesos. Any amount of net cash flows beyond 3
million pesos will not be hedged, but at least the MNC was able to hedge the minimum expected
net cash flows.
Counter-Point No. MNCs should not hedge unanticipated transactions. When they overhedge
the expected net cash flows in a foreign currency, they are still exposed to exchange rate risk. If
they sell more currency as a result of forward contracts than their net cash flows, they will be
adversely affected by an increase in the value of the currency. Their initial reasons for hedging
were to protect against the weakness of the currency, but the overhedging described here
would cause a shift in their exposure. Overhedging does not insulate an MNC against exchange
rate risk. It just changes the means by which the MNC is exposed.
Who Is Correct? Use the Internet to learn more about this issue. Offer your own opinion on this
issue.

Should an MNC Risk Over hedging Point Yes MNCs have

ANSWER
https://solvedquest.com/should-an-mnc-risk-over-hedging-point-yes-mncs-have/

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