To hedge payables, a futures or forward contract on the foreign currency can be purchased. Alternatively, a money market hedge strategy can be used; in this case, the MNC borrows its home currency and converts the proceeds into the foreign currency that will be needed in the future.

What type of option should the firm use to hedge its payables?

ANSWER: Currency call options should be purchased to hedge net payables. Currency put options should be purchased to hedge net receivables. Currency options not only provide a hedge, but they provide flexibility since they do not require a commitment to buy or sell a currency (whereas the forward contract does).

What is payment hedging?

Hedge Payments means any amounts payable by the Issuer as interest on the related notional amount under a Qualified Hedge Agreement; excluding, however, any payments due as a penalty or a fee or by virtue of termination of a Qualified Hedge Agreement or any obligation to provide collateral.