Hedging, or the creation of offsetting assets and liabilities so that gains on one side offset losses on the other, is a common but controversial practice. Arguments against hedging include which of the following statements?
A) Shareholders are better able to diversify currency risks and match their own risk tolerances and currency preferences.
B) When the parity conditions hold the NPV of hedging is zero; managers cannot consistently beat the market.
C) If the market is efficient, currency risk is already factored into the company's stock price.
D) All of the statements above are arguments against hedging.
E) Only statements a and b are arguments against hedging.

Question

Quizplus · Accepted Answer

All the statements provided are arguments against hedging. Statement A suggests that shareholders can manage risk more effectively on their own. Statement B implies that hedging does not add value in efficient markets. Statement C argues that market efficiency already incorporates currency risk into stock prices, making hedging unnecessary.

Hedging, or the Creation of Offsetting Assets and Liabilities So