In currency risk management, which strategy is a natural hedge?

• A. Using currency futures
• B. Matching cash flows in the same currency
• C. Borrowing in foreign currency
• D. Currency option hedges

Answer: (B)

Natural hedges come from structuring operations so that cash inflows and outflows occur in the same currency, creating an automatic offset against exchange-rate movements. When a company has revenues and costs in the same currency, or payables and receivables in that currency, the net exposure to currency swings is reduced without using external instruments. This is more straightforward and often cheaper than hedging with derivatives like futures or options, which lock in a rate or provide protection but add cost and complexity. Borrowing in a foreign currency, on the other hand, introduces additional exposure because debt service depends on that currency’s value. So matching cash flows in the same currency achieves the offset most directly and naturally.