The correct answer is: A. Hedging transaction exposure.
Hedging transaction exposure is a type of foreign exchange risk management that involves using financial instruments to protect against the risk of losses due to changes in exchange rates. Transaction exposure arises when a company has an obligation to make or receive a payment in a foreign currency. For example, if a company imports goods from a foreign country, it will be exposed to transaction exposure if the exchange rate between the two currencies changes between the time the order is placed and the time the goods are paid for.
There are a number of different ways to hedge transaction exposure. One common method is to use forward contracts. A forward contract is an agreement to buy or sell a certain amount of a currency at a specified exchange rate on a specified date in the future. Forward contracts can be used to hedge both payables and receivables.
Another common method of hedging transaction exposure is to use options. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain amount of a currency at a specified exchange rate on or before a specified date in the future. Options can be used to hedge both payables and receivables.
Hedging transaction exposure can help companies to protect themselves against losses due to changes in exchange rates. However, it is important to note that hedging also involves costs. The cost of hedging depends on the type of hedging instrument used and the prevailing market conditions.
Here is a brief explanation of each option:
- A. Hedging transaction exposure: Hedging transaction exposure is a type of foreign exchange risk management that involves using financial instruments to protect against the risk of losses due to changes in exchange rates. Transaction exposure arises when a company has an obligation to make or receive a payment in a foreign currency.
- B. Hedging balance sheet exposure: Hedging balance sheet exposure is a type of foreign exchange risk management that involves using financial instruments to protect against the risk of losses due to changes in exchange rates on the company’s balance sheet. Balance sheet exposure arises when a company has assets or liabilities denominated in foreign currencies.
- C. Hedging economic exposure: Hedging economic exposure is a type of foreign exchange risk management that involves using financial instruments to protect against the risk of losses due to changes in exchange rates on the company’s operating income. Economic exposure arises when a company’s costs or revenues are affected by changes in exchange rates.
- D. Hedging cost exposure: Hedging cost exposure is a type of foreign exchange risk management that involves using financial instruments to protect against the risk of losses due to changes in exchange rates on the company’s costs. Cost exposure arises when a company’s costs are denominated in foreign currencies.