When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as:
A) leading.
B) lagging.
C) cross-hedging.
D) currency diversification.
E) All of these are correct.
Answer Key

Question

Quizplus · Accepted Answer

All of the methods listed (leading, lagging, cross-hedging, and currency diversification) can help reduce transaction exposure when a perfect hedge is not possible. Leading means collecting payment earlier to avoid currency fluctuations, while lagging means delaying payment to a later date. Cross-hedging involves using a financial instrument that is not a perfect match for the currency being hedged, but is still correlated enough to provide some protection. Currency diversification involves holding assets in different currencies to spread out the risk of currency fluctuations.

When a Perfect Hedge Is Not Available to Eliminate Transaction