An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using options is that a premium must be paid for it.

Question

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This statement is true. Options give the MNC the right, but not the obligation, to sell or buy an asset at a predetermined price. If the exchange rate moves in a favorable direction, the MNC can let the option expire and benefit from the favorable exchange rate. However, if the exchange rate moves in an unfavorable direction, the MNC can use the option to limit its losses. The disadvantage of using options is that a premium must be paid for it, which is the cost of buying the option.

An Advantage of Using Options to Hedge Is That the MNC