An entity can hedge the exposure position of a foreign investment by raising loans in a foreign country denominated in the functional currency of the foreign operation

Question

Quizplus · Accepted Answer

By raising loans denominated in the functional currency of the foreign operation, the entity can offset currency fluctuations and mitigate the risk of exchange rate volatility on their foreign investment. This is a common hedging strategy known as natural hedging.

An Entity Can Hedge the Exposure Position of a Foreign