MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect.
A) payables; euros
B) receivables; euros
C) payables; dollars
D) receivables; dollars

Question

Quizplus · Accepted Answer

If an American-based MNC has receivables in euros, it can borrow euros to offset the potential loss from exchange rate fluctuations. By borrowing in the same currency as the receivables, the MNC can effectively hedge their exposure. Borrowing payables or dollars would not provide the same hedge.

MNCs Can Use Short-Term Foreign Financing to Reduce Their Exposure