If you owe a foreign currency denominated debt, you can hedge with
A)a long position in a currency forward contract.
B)a long position in an exchange-traded futures option.
C)buying the foreign currency today and investing it in the foreign county.
D)both a and c

Question

Quizplus · Accepted Answer

A long position in a currency forward contract and buying the foreign currency today and investing it in the foreign country are both effective ways to hedge against foreign currency denominated debt. The combination of the two strategies provides a more robust hedge. With a long position in a currency forward contract, you can lock in a future exchange rate and thereby eliminate the currency risk. When you buy the foreign currency today and invest it in the foreign country, you earn interest on your investment in the local currency, which helps offset the interest payments you make on your debt. Together, these strategies provide a more comprehensive hedge against foreign exchange rate risk.

If You Owe a Foreign Currency Denominated Debt, You Can