Options can be used to both directly and indirectly hedge currency risk. Futures can do the same. The above is true - what are they saying? That a substitute currency with a high correlation to the local currency can be used for an indirect hedge? I’m pretty sure that’s it, just want confirmation. Danka.
I think that is what they are saying Philly. Direct hedge vs Proxy hedge (cross hedge). I am not positive though.
Yes, from Schweser: “hedge using an actively-traded futures contract on a correlated currency” Some currencies do not have liquid forward/futures markets, so thats why.
I guess even if there are futures, but they are not liquid, you are trading the spread on the futures contract for the basis risk. So you can either use the crappy future with the large spread or the liquid future in a proxy hedge, but now you take on basis risk. You would have to evaluate to see which was the bigger risk.
Good point mwvt9 - gives some insight into why someone may enter a proxy (cross) hedge.