Which is an example of financial risk management mentioned in the material?

Which is an example of financial risk management mentioned in the material?

• A. Increasing leverage without hedging
• B. Ignoring currency risk
• C. Hedging currency risk with forwards
• D. Speculating on currencies

Answer: (C)

Managing currency risk through hedging with forwards is a standard example of financial risk management. When a company has cash flows or obligations in a foreign currency, exchange rate movements can create uncertainty in profits and liquidity. A forward contract locks in a future exchange rate, reducing that uncertainty and stabilizing expected cash flows. The other options describe actions that either add risk (increasing leverage without hedging), ignore risk (not addressing currency exposure), or pursue speculation (currency bets) rather than protection.

Managing currency risk through hedging with forwards is a standard example of financial risk management. When a company has cash flows or obligations in a foreign currency, exchange rate movements can create uncertainty in profits and liquidity. A forward contract locks in a future exchange rate, reducing that uncertainty and stabilizing expected cash flows. The other options describe actions that either add risk (increasing leverage without hedging), ignore risk (not addressing currency exposure), or pursue speculation (currency bets) rather than protection.