Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Investors looking to hedge the risk of a euro-zone breakup should target the Danish krone since it is managed tightly against the euro, ING Bank said Thursday. In a note to clients, the Dutch group--which does not anticipate a euro-zone breakup--said the high uncertainty surrounding the fate of the euro and how a dismantling of the bloc might play itself out mean that investors are reluctant to use the euro directly when hedging against breakup risks. "And that is why we think the Danish krone could present itself as a proxy hedge for the euro," ING said. The bank added that because half of all Danish exports end up in the euro zone, the country in practice has managed its currency peg more closely than necessary, according to the terms of the European Exchange Rate Mechanism by which it is governed. "The Danish krone is in ERM II, and pegged to the euro at a central rate of 7.46 +/- 15%," ING said. "However, because of close economic ties, Denmark has chosen to manage [the exchange rate] in much narrower bands of 7.46 +/- 2.25%." By 1050 GMT the krone was trading at 7.4350 against the euro and 5.5502 against the dollar. As a result, ING said the krone should fall "reasonably hard" against currencies outside the euro-zone in the event of a euro-zone breakup. "And thus dollar/krone may be a good proxy to hedge downside risk in euro/dollar," ING said. "If euro/dollar were to fall to 0.85 under a break-up, could dollar/krone rally 30% to say 7.20?" It said. The bank recommends using options--a type of financial derivative that gives the holder the right but not the obligation to buy or sell a market at a predefined price by a predefined time--to capture the potential exchange-rate shift. - By Eva Szalay, Dow Jones Newswires; 44 20 7842 9305; (eva.szalay@dowjones.com)

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