Currency hedging is the act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates. Currency hedging is used by financial investors and businesses to eliminate risks they encounter when conducting business internationally. Hedging can be likened to an insurance policy that limits the impact of foreign exchange risk.
Hedging can be done by purchasing or booking different types of contracts that are designed to achieve specific goals. Hedging can be accomplished by purchasing or booking different types of contracts that are designed to achieve specific goals. Hedging can be a very complicated activity. The various hedging mechanisms range from basic to extremely intricate. The most prudent first steps, when considering a hedging strategy, would be to take note of potential foreign exchange exposure and, based on that, evaluate what goals need to be set and what actions need to be taken in order to mitigate that risk.
Hedging instruments
Hedging techniques generally involve the use of complicated financial instruments known as derivatives the two most common of which are options and futures.
Currency hedging is usually done through engaging in currency derivatives.
