Hedging risk

Which of the following is a potential risk of cross-hedging?

• Price divergence risk

• Inflation risk

• Interest rate risk

• Currency appreciation risk

Which of the following is true about cross-hedging in foreign exchange?

• It involves using a derivative instrument based on the same currency being hedged.

• It is only used when the cost of hedging in the original currency is low.

• It involves using a derivative instrument based on a different but correlated currency to the one being hedged.

• It is not a common strategy in foreign exchange.

What is the main benefit of cross-hedging?

• Eliminate all currency risk.

• Always cheaper than hedging in the original currency.

• A guaranteed way to make a profit.

• Allow investors to hedge currency risk when hedging in the original currency is not practical or too expensive.

What should be considered to assess if cross-hedging strategy is effective?

• Correlation between assets/currency

• Liquidity

• Market price

• Both A and B

How many alternatives for Bankware were suggested? (number)

(a)  

If Bankware (USD) has an invoice in EUR by a foreign business that will be paid 1 year later, how can the company hedge against risks?

• Keep it simple, no need to hedge

• Buy future/forward contracts

• Sell future/forward contracts

• Sell something having the same value to that foreign company

If Bankware were to receive a payment from a Vietnamese company (in VND) next year, what kind of risks they may encounter?

• Depreciation in VND

• Depreciation in USD

• Credit risk

• Another pandemic/crisis

If Bankware sent an invoice to the Vietnamese company (in VND) and decided to cross hedge by buying forward contract, what should they choose?

• A currency with positive correlation with VND

• A currency with negative correlation with VND

• A currency with positive correlation with USD

• A currency with negative correlation with USD