One problem that investors in foreign countries face is the possibility of a decline in the value of that foreign country's currency. Which of the following would be an effective way to offset this problem?
A) Be ready to pull out at the first sign of trouble.
B) Convert as many of your dollars into their dollars as possible.
C) Hedge through currency swaps.
D) Finance your investment outside of that country.

Question

Quizplus · Accepted Answer

Hedging through currency swaps is an effective way to offset the risk of a decline in the value of a foreign currency. This involves entering into an agreement to exchange currencies with another party at an agreed-upon exchange rate, which helps to lock in a certain value for the investment. Option A is not a wise choice as it is reactive and does not address the problem. Option B could actually increase the investor's exposure to currency risk. Option D may not be feasible as some investments require financing from within the local market.

One Problem That Investors in Foreign Countries Face Is the Possibility