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risk diversification

In FX management, risk diversification refers to foreign exchange risk being managed centrally on a portfolio basis. This approach allows the firm to manage FX exposures in several currency pairs by taking advantage of natural offsets and currency correlations existing within the portfolio. When it is considered practical, the remaining exposures are hedged with forward contracts.

In general terms, the lower the correlation between changes in currency values, the higher the benefits of diversification and the lower the hedging requirements.