An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by seeking out potential suppliers in Japan. This hedging strategy is referred to as:
A) a natural hedge.
B) currency-switching.
C) matching.
D) diversification.

Question

Quizplus · Accepted Answer

A natural hedge is when a company reduces its exposure to currency risk by using a hedging strategy that is part of its normal operating activities. In this case, the MNE is hedging its long-term yen inflows by seeking out suppliers in Japan, which is a natural way to offset the currency risk. Currency-switching, matching, and diversification are not the most appropriate terms for this strategy.

An MNE Has a Contract for a Relatively Predictable Long-Term