Hedging


- The spot exchange rate is the value of one currency in another currency on a particular day

- Hedging helps reduce the level of uncertainty involved with international financial transactions.

  • Allows businesses to overcome effects of exchange rate fluctuations
  • Eliminates risk for trader because exchange rate has been set for when the contract is finalised.
  • Business is unable to take advantage of favourable movements in the exchange rate.
  • Natural hedging: when businesses adopt strategies to minimise forex risk e.g. establishing offshore subsidiaries, transactions in same currency.

Extract from Business Studies Stage 6 Syllabus. © 2010 Board of Studies NSW.