To hedge a contingent exposure, in which an MNC's exposure is contingent on a specific event occurring, the appropriate hedge would be a(n) ____ hedge.

Question

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Options provide the MNC with the flexibility to protect against downside risk while allowing potential upside gains if the contingent event does not occur. The MNC can purchase a put option to protect against the contingent exposure, which would give them the right but not the obligation to sell a specific currency at a predetermined price, protecting them against a potential drop in currency value. Alternatively, they could purchase a call option, which gives them the right but not the obligation to buy a specific currency at a predetermined price, protecting them against a potential rise in currency value. Both strategies provide downside protection while leaving room for potential gains. Money market hedges would not be appropriate for a contingent exposure as they only address short-term cash management needs. Futures and forwards would require the MNC to lock in a specific currency rate, which would not be appropriate if the contingent event did not occur. Therefore, options are the best choice for hedging a contingent exposure.

To Hedge a Contingent Exposure, in Which an MNC's Exposure