Explain the alternative hedging techniques of Leading & Lagging, Cross-Hedging and Currency Diversification

See answer and explanation below.

Explanation:

These are explained as follows:

Leading & Lagging techniques

Leading and lagging hedge techniques refer to the strategies employed to adjust the timing of a payment request or disbursement in order to show the expectations about future currency movements.

Specifically, leading implies that a payment is made quickly or expedited, while lagging implies that a payment is deferred.

Cross-Hedging

Cross-hedging is an act of hedging risk whereby two different currencies which have a strong positive correlation between are used.

Cross-hedging is done by taking opposing positions in the two currencies in order to reduce the associated with holding just one currency.

Currency Diversification

Currency Diversification refers to an investing or financing strategy in which more than one currency is used or held as a portfolio.

The primary aim of currency diversification is to reduce the exposure to exchange rate movement or risk usually associated with holding a single foreign currency.

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