Which strategy is NOT commonly used to manage foreign exchange risk?

The strategy of investing solely in domestic markets is not commonly used to manage foreign exchange risk because it does not address the risk itself. Companies that operate internationally or have exposure to foreign currencies face the potential for fluctuating exchange rates that can impact their financial performance.

By focusing only on domestic markets, a company may evade direct foreign exchange risk but does not implement any proactive strategies to manage it. In contrast, hedging, diversification of currency exposure, and using financial instruments like options and futures are established methods that specifically aim to mitigate the risks associated with currency fluctuations.

Hedging involves taking offsetting positions in the currency market to protect against adverse movements in exchange rates. Diversification of currency exposure spreads risk across multiple currencies, which can help to reduce the overall impact of any single currency's volatility. Financial instruments like options and futures allow businesses to lock in exchange rates or protect against potential losses, thereby providing mechanisms to effectively manage foreign exchange risk.