medium · FRM Part 1 Foundations of Risk Management

Which of the following best describes the 'Hedging Paradox' mentioned in the context of corporate risk management?

1. Hedging a liability exposure creates an offsetting asset exposure.
2. The costs of hedging will always exceed the benefits of risk reduction here.
3. A perfect hedge, by its very construction, actually increases basis risk for the firm.
4. Hedging reduces risk but may decrease firm value in a frictionless market.

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