I thought I had the differences between these two straight, but on the CFA/ Schweser pract tests I was definitely confused after reading the answers. Can someone please right a quick summary of each, maybe with an example? Thx
Proxy, think, you are using a proxy or stand in currency to hedge another currency it is correlated with. Cross, You enter in a contract to deliver a different foreign currency for the first foreign currency.
Proxy: sell a separate foregin currency forward against your domestic currency Cross: sell your foreign currency against another foreign currency
proxy: actually trying to hedge your domestic currency, so you use one that’s correlated cross: don’t really care about hedging, trying to take advantage of 2 different currencies to hedge against each other (more of a profit approach)…I think
Everyone is correct. I just remember that cross hedging is like cross dressing, ie. “extreme” fetish or slapping a dress on a man even though it doesn’t match: cross hedging a currency: using a currency that is totally different from the one you’re trying to hedge (doesn’t match) cross hedging bonds with futures: using a futures contract that is totally different from the underlying bond because the bond is illiquid or futures for the bond don’t exist (doesn’t match) cross default: when defaulting on one issue, you default on every issue (extreme)
Forward ---- > Proxy ---- > Cross Fuc*&^g ----> Politically ----- > Correct