Explanation:
An on-balance-sheet hedge matches foreign-currency assets with foreign-currency liabilities, reducing or eliminating FX exposure on that position.
However, it does not guarantee profitability. The bank can still lose money if the interest spread is too small, asset performance is poor, or other risks emerge.
Therefore, the correct statement is that the hedge cannot ensure a positive net return.
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Question-193.3. Which of the following is true about the use of an ON-BALANCE-SHEET HEDGE to control a bank’s foreign exchange (FX) exposure?
A
The hedge will lock in (guarantee) a specific, predetermined net return
B
The hedge can ensure a positive, but nevertheless volatile, net return
C
The hedge cannot ensure a positive net return
D
By employing a forward foreign currency contract, the on-balance-sheet hedge can ensure a positive return that is also not volatile