If foreign currency exchange rates are highly positively correlated,how can a FI reduce its exchange rate risk exposure?
A)By taking net long positions in all currencies.
B)By taking net short positions in all currencies.
C)By taking opposing net short and net long positions in different currencies.
D)By maximizing net FX exposure in each currency,independently.

Question

Quizplus · Accepted Answer

By taking opposing net short and net long positions in different currencies, the FI can reduce its overall exposure to exchange rate risk. This strategy is known as currency hedging and involves taking positions in currencies that have negatively correlated exchange rates. By doing so, losses in one currency can be offset by gains in another currency. Taking net long positions in all currencies (choice A) would increase the FI's exposure to exchange rate risk, while taking net short positions in all currencies (choice B) would leave the FI vulnerable to losses if exchange rates were to move in unexpected ways. Maximizing net FX exposure in each currency, independently (choice D) would also increase the FI's exposure to exchange rate risk.

If Foreign Currency Exchange Rates Are Highly Positively Correlated,how Can