Question
Which of the following statement(s) is/are true? (Select the correct answer from the options below the statements) (1) Internal hedging is using techniques that are available within the entity to manage exchange-rate risks (2) Internal hedging does not operate through the foreign-exchange markets (3) Internal hedging can be bought and sold on the foreign-exchange markets (1) and (2) (1) only (1) and (3) (1), (2) and (3)
Answer
4.2
(170 Votes)
Orla
Professional · Tutor for 6 years
Answer
(1) and (2)
Explanation
## Step 1: Understand the term 'Internal hedging'.Internal hedging refers to how companies limit exposure to foreign exchange risks using internal strategies rather than turning to the market for solutions ( c.f., buying futures or options etc.). Commonly, those strategies involve structuring contracts or company operations to resolve present or possible payment and foreign currency issues.## Step 2: Evaluate each statement given:### (1) Internal hedging is using techniques that are available within the entity to manage exchange-rate risks:This statement is in accordance with the definition of and concept behind internal hedging, therefore it is correct.### (2) Internal hedging does not operate through the foreign-exchange markets:This is true since internal hedging refers to strategies employed within a company. Unlike external hedging, it does not pertain to operations in foreign-exchange markets such as futures and options trading.### (3) Internal hedging can be bought and sold on the foreign-exchange markets:Internal hedging techniques are within an organisation's internal-risk management process. They are not external-based securities nor are they market products. Thus, they cannot be purchased or sold on the foreign-exchange markets. Consequently, this statement is false.## Step 3: Matching correct option with true statements: By examining the options below the statements, considering that only statements (1) and (2) are true, the correct option should be "(1) and (2)".