A cross-hedging strategy is most effective with currencies that are _____, whereas currency diversification is most effective with currencies that are ______.
A)highly positively correlated; not highly correlated
B)highly negatively correlated; not highly correlated
C)expected to appreciate; expected to depreciate
D)expected to depreciate; expected to appreciate

Question

Quizplus · Accepted Answer

Cross-hedging is most effective with currencies that are highly positively correlated because the movements of one currency can predict the movements of another, allowing for effective hedging. Currency diversification, on the other hand, works best with currencies that are not highly correlated, as it spreads the risk across currencies that do not move in tandem.

A Cross-Hedging Strategy Is Most Effective with Currencies That Are