A __________ involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in such a way that losses on the first exposed position should be offset by gains on the second currency exposure and vice versa.
A) forward contract
B) currency collar
C) money-market hedge
D) currency option

Question

Quizplus · Accepted Answer

A currency collar is a strategy for managing foreign exchange risk in which an investor holds a long position in a currency but wants to limit the potential loss due to exchange rate fluctuations. It involves buying both a put option and a call option on the currency with strike prices that bracket the current exchange rate. This limits the upside potential for gains but also limits the downside risk of losses. This option combination is used to protect against currency fluctuations while allowing for potential gains if the market moves in favor of the investor.

A __________ Involves Offsetting Exposures in One Currency with Exposures