When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____.
A) leading
B) lagging
C) cross-hedging
D) currency diversification
E) all of the above

Question

Quizplus · Accepted Answer

All of the options listed can be used to reduce transaction exposure if a perfect hedge is not available. Leading involves collecting payment from customers before payment is due to suppliers and can help reduce a firm's exposure to exchange rate fluctuations when paying suppliers. Lagging involves delaying payment to suppliers until all payments have been received, reducing a firm's exposure to exchange rate fluctuations when collecting payment from customers. Cross-hedging involves using financial instruments to hedge against currency risk using a different currency. Currency diversification involves diversifying a firm's currency exposures by conducting business in multiple currencies.

When a Perfect Hedge Is Not Available to Eliminate Transaction