In examining its need to cover its exposures to foreign exchange risk,a company obtains current data on the correlation between various currencies to which it is exposed.The company determines that its main currency exposures are to the USD and the JPY.These currencies have a correlation coefficient of +0.96.Based on the spot rate for each of the currencies,the company expects USD cash inflows equivalent to AUD 500 000,and JPY cash inflows equivalent to AUD 495 000.Which of the following statements is most correct?
A) High positive correlation between USD and JPY (hedge risk exposure)
B) High positive correlation between USD and JPY (little need to hedge risk) exposure
C) High positive correlation between USD and AUD (hedge risk exposure)
D) Low negative correlation between USD and AUD (no need to hedge risk exposure)

Question

Quizplus · Accepted Answer

The high positive correlation coefficient of +0.96 between USD and JPY implies that they generally move in the same direction, which means that there may be little benefit in hedging against their combined exposure. As a result, the company may not need to hedge their risk exposure.

In Examining Its Need to Cover Its Exposures to Foreign