1. hedge against a depreciation of the franc in terms of the mark by selling francs for marks forward 30 days.
2. hedge against a depreciation of the franc in terms of the mark by selling 30 day French Treasury bills, converting the funds into marks, and investing them in 30 day German Treasury Bills.
3. cover her position by doing either of the above.
Choose the option that yields the correct answer.
The correct answer is option 3. A depreciation of the franc in terms of the mark is the same as an appreciation of the mark in terms of the franc---the price of marks in terms of francs rises. The way to hedge, cover, or protect oneself against a rise in the price of the mark is to either buy the mark forward or buy the marks now and hold them for 30 days. If one were to adopt the latter strategy, one would convert interest earning franc-denominated assets into interest-earning mark denominated assets that will mature (i.e., come due) in 30 days.
A rise in the price of marks in terms of francs represents an appreciation of the mark in terms of the franc because marks become more valuable in terms of francs---that is, it takes less marks to purchase a franc. This implies, of course, an equivalent depreciation (decline in value) of the franc in terms of the mark because it now takes more francs to purchase a mark.