What might be a consequence of failing to hedge an investment?

Failing to hedge an investment can lead to increased exposure to market volatility, which is why this choice is the most appropriate consequence. Hedging is a risk management strategy used to offset potential losses in an investment by taking an opposite position in a related asset. Without hedging, an investor may be more vulnerable to fluctuations in market prices that can significantly impact the value of their investment.

In periods of high volatility, such as economic downturns or unexpected market events, an unhedged position could lead to substantial financial losses. The investor retains full exposure to both positive and negative market swings, which could affect their overall investment strategy and financial health.

Other options, while they can be relevant in different contexts, do not directly relate to the primary risk an unhedged position faces. For instance, higher transaction costs may arise from frequent buying and selling of securities, but this is not a direct result of failing to hedge. Similarly, lower capital gains and negative cash flow may occur due to various factors unrelated to hedging specifically. Hence, the most direct consequence of not hedging is indeed increased exposure to market volatility.