Which one of the following management techniques is likely to best offset the risk of long-run exposure to payables denominated in a particular foreign currency?
A) Borrow money in the foreign currency in question.
B) Lend money in the foreign currency in question.
C) Rely on the Federal Reserve Board to enact monetary policy favorable to your exposure risk.
D) none of the above

Question

Quizplus · Accepted Answer

By lending money in the foreign currency in question, the company can earn interest in that currency and offset any losses from long-run exposure to payables denominated in that currency. This strategy is known as natural hedging. Option A may expose the company to even more risk if the foreign currency appreciates relative to the company's domestic currency. Option C is not within the control of the company and cannot be relied on as a management technique. Option D is not a valid choice.

Which One of the Following Management Techniques Is Likely to Best