Derivatives markets provide tools for managing currency risk from "summary" of International Money and Finance by Michael Melvin
Derivatives markets play a crucial role in offering tools for managing currency risk. Currency risk arises from fluctuations in exchange rates, which can have a significant impact on the value of assets and liabilities denominated in foreign currencies. Companies engaged in international trade or investment are especially vulnerable to currency risk, as they are exposed to fluctuations in exchange rates that can affect their profitability and competitiveness. One common way to manage currency risk is through the use of currency derivatives, such as forward contracts, futures contracts, options, and swaps. These financial instruments allow companies to hedge their exposure to currency risk by locking in exchange rates for future transactions. For example, a company that expects to receive payment in a foreign currency can enter into a forward contract to sell that currency at a predetermined exchange rate, thereby protecting itself against ...
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