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Suppose that the value of the firm, expressed in terms of the owner's currency, is a nonlinear function of the exchange rate up to random
Suppose that the value of the firm, expressed in terms of the owner's currency, is a nonlinear function of the exchange rate up to random noise. Suppose that you fit a linear regression through this relationship, and you hedge with a forward sale with size equal to the regression coefficient. (Choose the correct answer(s)) Select one or more: o A. All risk will be eliminated. O B. There is remaining risk, but it is entirely independent of the realized value of the exchange rate. O C. There is remaining risk, but it is uncorrelated to the realized value of the exchange rate. D. There is no way to further reduce the variance of the firm's hedged value. o E. There is no way to further reduce the variance of the firm's hedged value if only exchange rate hedges can be used. O F. There is no way to further reduce the variance of the firm's hedged value if only linear exchange rate hedges can be used
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