How can a bank avoid exchange rate risk?

Question

Quizplus · Accepted Answer

By matching the currency denomination of assets and liabilities, a bank can avoid exchange rate risk. This means that the bank would borrow in the same currency in which it lends, thereby eliminating the risk of fluctuating exchange rates. Buying financial futures, call options, or put options may provide some protection against exchange rate risk, but these strategies also come with their own costs and risks. Matching currencies is the simplest and most effective way for a bank to avoid exchange rate risk.

How Can a Bank Avoid Exchange Rate Risk