In the figure below,label curves A and B respectively,

Question

Quizplus · Accepted Answer

Curve A represents the domestic currency value of an asset and curve B represents the foreign currency value of the same asset. When an investor holds this asset without any hedging, they are exposed to foreign exchange risk, which means that any change in the exchange rate will directly impact their returns. This is represented by curve A, which shows a volatile pattern due to the impact of exchange rate fluctuations.

On the other hand, when an investor hedges their position, they use financial instruments such as forwards, futures, options, or swaps to reduce or eliminate their exposure to foreign exchange risk. This is represented by curve B, which shows a stable upward trend as it reflects the value of the asset in the foreign currency, adjusted for the impact of the hedging instrument.

Therefore, the best choice is A) unhedged, hedged, as it represents the impact of foreign exchange risk and the effectiveness of hedging.

In the Figure Below,label Curves a and B Respectively