– 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.