Which of the following list would not be effective as a hedge for a Canadian company with a large number of transactions in Denmark?
A)Danish krone held by a Canadian bank.
B)A forward contract for the purchase of Danish krone.
C)A forward contract for the sale of Danish krone.
D)Canadian funds held by a Danish bank.

Question

Quizplus · Accepted Answer

Canadian funds held by a Danish bank would not be an effective hedge for a Canadian company with a large number of transactions in Denmark because it does not address the exchange rate risk. The company would still be exposed to fluctuations in the exchange rate and could potentially suffer losses due to currency fluctuations. Options A, B, and C all address exchange rate risk by either holding or purchasing Danish krone at a fixed rate.

Which of the Following List Would Not Be Effective as a Hedge