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Currency hedging is important in managing risks by allowing a company to predetermine the profit it will make on a transaction.
Currency hedging, if used correctly, can be beneficial to a company. Currency hedging is the act of entering into a contract, today, with a foreign exchange company to exchange a foreign currency into US currency at a certain exchange rate on a specified date in the future.
For instance, a US company enters into a contract with a company in Europe to sell a product; the contract amount is 3. To protect its profits, the US company would then negotiate a forward transaction with a foreign exchange bank to convert euros to dollars on the date payment is due from the other company.
The foreign exchange bank will quote the US company an exchange rate for that date. When the US company converts the Euro payment to US dollars, the US company will receive the quoted exchange rate regardless of the current exchange rate.
Besides forward transactions, other currency hedging tools include spot contracts, window forwards, options, currency swaps, and non-deliverable forwards.
A spot contract converts foreign currency into US dollars or US dollars into foreign currency at today's interest rates. This form of currency hedging is usually used by individuals traveling overseas or to the US that need to convert their money into usable currency within the visiting country.
Window forwards are often used when there is uncertainty regarding the actual payment date. A currency swap lets a company to "simultaneously purchase and sell a given currency at a fixed exchange rate and then re-exchange those currencies at a future date.
Non-deliverable forwards are "a way to hedge exposures in emerging market currencies where a conventional forward market does not exist or is restricted. A perfect hedge reduces your risk to nothing except for theLatest news, expert advice and information on money.
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Write an essay on the forward Currency Exchange Market explaining in detail why such a market exists and how it operates; its dealers its buyers, the purposes for which the foreign currency is used.
Foreign Exchange Market and Currency Board Arrangement Essay. D) Question 1 Question 2 2. “A country is always worse off when its currency is weak (falls in value)”. Essays should answer the question by taking a stance and making a case based on argument and facts.
The best essay in each category will be published on The Economist’s Open Future website and.