Limitation of Hedging an Uncertain Payment
Some international transactions involve an uncertain amount of goods to be ordered and therefore involve an uncertain transaction payment in a foreign currency. An MNC may create a hedge for a larger number of units than it will actually need. See next slide…
Limitation of Repeated Short-Term Hedging
The continual short-term hedging of repeated transactions may have limited effectiveness.
Long-term Hedging as a Solution
Some banks offer forward contracts for up to 5 years or 10 years on some commonly traded currencies.