Final answer:
A financial institution or brokerage company typically facilitates hedging to protect clients from currency risk, such as fluctuating exchange rates when dealing with international contracts. Hedging is used to lock in exchange rates for future transactions, safeguarding against potential losses due to currency devaluation.
Step-by-step explanation:
Which type of institutional investor might choose to hedge an exposure in oil with an opposite position in US dollars depends on the profile and goals of the institution. A financial institution or brokerage company typically handles hedging activities for clients seeking to protect themselves against currency risk. In the context of an American company exporting to France and receiving payments in euros, hedging would involve a financial transaction ensuring a set exchange rate one year from now, guarding against the possibility that the euro will depreciate against the US dollar.
For investors concerned about the dollar's value related to oil prices, a USD hedge could be appealing. Oil prices and the US dollar often move inversely since oil is priced in dollars; a rise in oil could mean a weaker dollar and vice versa. A fund that holds assets based on oil might use such a hedge to guard against potential losses from a rise in the dollar, which could decrease oil profits when converted back to dollars.