MCQs on Hedging in Forex
1. What is the primary purpose of hedging in Forex trading?
A) To make a profit
B) To reduce risk
C) To increase exposure
D) To speculate on currency movements
Answer: B) To reduce risk
2. Which of the following is a common hedging strategy in Forex?
A) Day trading
B) Scalping
C) Forward contracts
D) Swing trading
Answer: C) Forward contracts
3. How does a Forex trader typically hedge against currency risk?
A) By buying stocks
B) By using options or futures contracts
C) By ignoring market trends
D) By investing in real estate
Answer: B) By using options or futures contracts
4. What is a “long hedge”?
A) Selling a currency to protect against a decrease in value
B) Buying a currency to protect against an increase in value
C) Investing in commodities
D) Trading in different asset classes
Answer: B) Buying a currency to protect against an increase in value
5. What is a “short hedge”?
A) Buying a currency to protect against a decrease in value
B) Selling a currency to protect against a decrease in value
C) Investing in gold
D) Trading stocks
Answer: B) Selling a currency to protect against a decrease in value
6. Which of the following is NOT a type of hedging strategy?
A) Direct hedging
B) Cross hedging
C) Speculative hedging
D) Indirect hedging
Answer: C) Speculative hedging
7. When might a trader choose to use a hedging strategy?
A) When they want to take on more risk
B) When they anticipate volatility in the market
C) When they are confident about their predictions
D) When they do not want to trade at all
Answer: B) When they anticipate volatility in the market
8. What does “cross hedging” involve?
A) Hedging the same currency pair
B) Hedging with a different, but related asset
C) Not using any hedging strategy
D) Using only short positions
Answer: B) Hedging with a different, but related asset
9. How can options be used in hedging?
A) They can only be used for speculative trading
B) They provide the right, but not the obligation, to buy or sell a currency
C) They do not involve any costs
D) They are only for long-term investments
Answer: B) They provide the right, but not the obligation, to buy or sell a currency
10. What is a potential disadvantage of hedging in Forex?
A) It can eliminate all risks
B) It may reduce potential profits
C) It guarantees profits
D) It is always simple to execute
Answer: B) It may reduce potential profits
11. What is the role of a hedging strategy in a trader’s overall risk management plan?
A) To take excessive risks
B) To help manage and mitigate potential losses
C) To completely avoid the market
D) To increase leverage
Answer: B) To help manage and mitigate potential losses
12. Why might a business that imports goods use hedging?
A) To speculate on currency movements
B) To protect against rising costs due to currency fluctuations
C) To avoid all foreign transactions
D) To invest in stock markets
Answer: B) To protect against rising costs due to currency fluctuations
13. What is one of the main benefits of using forward contracts for hedging?
A) They are always free
B) They lock in exchange rates for future transactions
C) They eliminate all trading risks
D) They guarantee profits
Answer: B) They lock in exchange rates for future transactions
14. What is meant by “liquidity risk” in the context of hedging?
A) The risk of not being able to execute trades
B) The risk of losing money in investments
C) The risk of low volatility in the market
D) The risk of changes in interest rates
Answer: A) The risk of not being able to execute trades
15. Which market condition might make hedging less effective?
A) High volatility
B) Stable market conditions
C) Unexpected news events
D) All of the above
Answer: D) All of the above
