FOREIGN EXCHANGE EXPOSURE & MANAGEMENT

1. What is cross-hedging?

• Hedging using the exact same asset

• Speculating on future currency movements

• Hedging with a related asset that is positively correlated

• Avoiding hedging due to illiquidity

Which condition is necessary for an effective cross-hedge?

• The two assets must have historically high positive correlation

• The two assets must be negatively correlated

• The two assets must have identical volatility

• One asset must be from a developed country and the other from an emerging market

Which of the following is NOT a reason to use a cross-hedge?

• The asset to be hedged has an illiquid futures market

• There is no direct hedging instrument available

• The hedge instrument is more cost-effective

• The two assets are completely uncorrelated

If a U.S. firm has a receivable in Thai Baht and uses Japanese Yen to hedge, what type of hedge is this?

• Money market hedge

• Arbitrage

• Direct hedge

• Cross-hedge

Which of the following actions is part of a money market hedge for a payable in foreign currency?

• Borrow in foreign currency today

• Buy foreign currency forward

• Borrow in domestic currency

• Invest in foreign currency today

Why might a company prefer options over forwards or cross-hedging?

• Options require no upfront cost

• Options provide downside protection while preserving upside potential

• Options eliminate all forms of risk

• Options are always cheaper than forwards

In which situation might a cross-hedge be preferable to a money market hedge?

• When the company needs perfect matching of cash flows

• When interest rate parity holds perfectly

• When the exposure is to a major currency

• When borrowing in the foreign currency is expensive or restricted

As an Australia-based company that is going to receive THB 50,000 from client one year later, you will borrow THB 50,000 today to do a money market hedge.

• True
• False

Given that you and your team are going to set up a cross-hedge strategy, you will need to:

• Discount the future receivable

• Take opposing positions

• Use positively correlated assets

• Borrow foreign currency