Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?
A) Purchase Canadian dollars forward.
B) Purchase Canadian dollar futures contracts.
C) Purchase Canadian dollar put options.
D) Purchase Canadian dollar call options.

Question

​Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?
A) ​Purchase Canadian dollars forward.
B) ​Purchase Canadian dollar futures contracts.
C) ​Purchase Canadian dollar put options.
D) ​Purchase Canadian dollar call options.

Quizplus · Accepted Answer

Purchasing Canadian dollar put options is not an appropriate hedging technique for Kalons, Inc. in this scenario because put options give the holder the right to sell a currency at a specified price. Since Kalons is concerned about the Canadian dollar appreciating (meaning it would cost more USD to buy the same amount of CAD), they would benefit from strategies that lock in a purchase price or give them the right to buy at a certain price, not sell. Purchasing Canadian dollar call options (D), on the other hand, would be appropriate as it gives them the right to buy Canadian dollars at a set price, protecting against an appreciation.

​Kalons, Inc

Kalons, Inc