What is a primary component addressed by a currency risk management policy?

A currency risk management policy typically emphasizes the target proportion of currency exposure that should be passively hedged to manage potential risks associated with fluctuations in exchange rates. This aspect is crucial as it allows a company or investor to establish clear guidelines on the degree to which currency risks will be mitigated, thereby influencing investment strategies and overall risk exposure.

By setting a target proportion for passive hedging, the policy provides a framework for assessing how much currency exposure should be protected against volatility, which can help stabilize returns and avoid significant losses caused by adverse currency movements. It also enables better resource allocation in terms of cost and management focus for hedging activities.

Other options might present strategies or methods that are less directly related to establishing a solid foundation for managing currency risk through hedging practices. For instance, focusing on the frequency of active trading strategies could lead to higher transaction costs and increased risk, while simply investing in multiple currency types without hedging does not adequately address risk management. Utilizing only one type of forward contract limits the flexibility and potential advantages that can come from employing a diverse hedging strategy. Thus, the emphasis on passive hedging proportion is essential for a comprehensive and effective currency risk management policy.