Hedging is a common strategy for managing exchange rate risk from "summary" of International Financial Management, Abridged Edition by Jeff Madura
Hedging is a common strategy used by companies to manage the risk associated with fluctuations in exchange rates. When a company engages in international trade, it is exposed to the risk of exchange rate movements, which can significantly impact its profitability. By hedging, a company can protect itself against potential losses that may arise from adverse movements in exchange rates. There are various hedging techniques that companies can use to manage their exchange rate risk. One common hedging technique is the use of forward contracts. A forward contract is an agreement between two parties to exchange a specified amount of one currency for another currency at a predetermined exchange rate on a...
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