– 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.