Crouhy refers to the difference between hedging activities related to firm’s operations and hedging related to the balance sheet. When it comes to hedges, as risk-reducing positions, which of the following best summarizes his advice to managers?
A. If markets are perfect and the capital asset pricing model (CAPM) assumptions are true, then hedging and risk reduction are theoretically useless in all cases, including both operations and financial positions
B. Even if markets are imperfect and CAPM assumptions are false, hedging and risk reduction in theory cannot add value
C. Firms should risk-manage (e.g., hedge) their operations and, if markets are imperfect, maybe should hedge their assets and liabilities (so long as they disclose their hedging policy)
D. Firms should always hedge their balance sheets, even if markets are perfect, but they probably should not hedge their operations (and they should avoid disclosure in order to protect confidential information that might be revealed by, for example, forward transactions)
