Foreign Exchange | FX101

Currency Hedging

In very simple terms, 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 accomplished by purchasing or booking different types of contracts that are designed to achieve specific goals. These goals are based on the level of risk the customer is exposed to and seeking protection from then allowing them to lock in future rates without affecting, to a great extent, their liquidity.

Hedging can be a very complicated enterprise. 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, how does it work