How Do Businesses Hedge Against Exchange Rate Risks?
Businesses use various financial instruments to protect themselves against adverse exchange rate movements. Some common hedging strategies include: - Forward Contracts: Agreements to exchange currency at a predetermined rate on a specific future date. - Options Contracts: These give the holder the right, but not the obligation, to exchange currency at a specified rate before a certain date. - Currency Swaps: Agreements to exchange cash flows in one currency for cash flows in another currency over a specified period.