Question

"A cross-hedging strategy is most effective with currencies that are _____; currency diversification is most effective with currencies that are ______."

Answer 1

"A cross-hedging strategy is most effective with currencies that are highly positively correlated; currency diversification is most effective with currencies that are not highly correlated."

Explanation:

Cross hedging is a idea that is used to mange risk. This is done by  investing in two securities. Those two securities are correlated and that too positively. Which means their prices  goes in the identical direction. It helps in minimizing the risks associated.

So,A cross hedging strategy is most efficient when currencies are  positively correlated,

Currency diversification is a strategy where more than one currency is used in investment. It leads to less exchange rate risk. This strategy is most effective with currencies that are not highly correlated. Which means increase in one currency causes no increase in other currency.