Final answer:
Hedging is a financial transaction used to protect against investment risks, including currency risk. It can be used to eliminate risk by entering into a financial contract that guarantees a certain exchange rate in the future.
Step-by-step explanation:
Hedging is a financial transaction used to protect oneself against a risk from one of your investments, such as currency risk. In the context of the question, hedging can be used to remove risk through an opposing hedge position. By entering into a financial contract and paying a fee, an investor can guarantee a certain exchange rate one year from now, regardless of the market exchange rate at that time. This allows the investor to protect themselves from potential losses due to fluctuations in exchange rates. For example, if a U.S. firm is exporting products to France and will receive 1 million euros a year from now, they may want to hedge against the risk of the euro being worth less in U.S. dollars in the future. They can do this by signing a financial contract that guarantees a specific exchange rate, thus eliminating the risk of a potentially unfavorable exchange rate. Therefore, the correct answer to the question is B. Eliminate risk.