If you own a foreign currency denominated bond, you can hedge with A. buying the foreign currency today and investing it in the foreign county. B. a long position in an exchange-traded futures option. C. a long position in a currency forward contract. D. a swap contract where pay the cash flows of the bond in exchange for dollars

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Business

Maliyah Terry

14 January, 01:38

If you own a foreign currency denominated bond, you can hedge with A. buying the foreign currency today and investing it in the foreign county. B. a long position in an exchange-traded futures option. C. a long position in a currency forward contract. D. a swap contract where pay the cash flows of the bond in exchange for dollars

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Toby · Answer 1

D) a swap contract where pay the cash flows of the bond in exchange for dollars.

Explanation:

When an investor engages in foreign exchange hedge they are trying to reduce foreign exchange risk (risk associated with changes in foreign exchange rates). A foreign exchange swap contract is made between parties that agree to exchange a loan/bond issued in a foreign currency with a domestic (in US dollars) loan/bond of an equal value.

In other words, the company would need to exchange its foreign bond for a similar value domestic bond.