Question

Hedgehog International has numerous foreign exchange transactions. Management has elected to hedge transactions as a means of mitigating transaction exposure to exchange rate risk. What is the most effective means that Hedgehog International can use to avoid overhedging?

A. Hedgehog should acquire parallel loans to provide a means for liquidating needed hedge securities
B. Hedgehog should acquire the maximum amount require to hedge known and projected transactions
C. Hedgehog should acquire the minimum amount required to hedge known transactions
D. Hedgehog should enter into a cross hedging agreement

Answer 1

Hedgehog International can avoid overhedging by acquiring the minimum amount required to hedge known transactions.

Step-by-step explanation:

The most effective means that Hedgehog International can use to avoid overhedging is to acquire the minimum amount required to hedge known transactions. Overhedging refers to hedging more than necessary, which can result in unnecessary costs and complications. By acquiring only the minimum amount needed to hedge known transactions, Hedgehog International can minimize their exposure to exchange rate risk while avoiding the drawbacks of overhedging.