The forward market hedge

A forward-exchange market hedge involves the exchange of one currency for another at a fixed rate on some future date to hedge transaction exposure. The purchase of a forward contract substitutes a known cost for the uncertain cost due to foreign-exchange risk caused by the possible devaluation of one currency in terms of another. Although the cost of a forward contract is usually smaller than the uncertain cost, the forward contract does not always assure the lowest cost due to foreign-exchange rate change. The forward contract simply fixes this cost in advance, thus eliminating the uncertainty caused by foreign-exchange rate changes. For example, an American company may have a euro import payable in 9 months. The American company can cover this risk by purchasing euros at a certain price for the same date forward as the payment maturity.

Was this article helpful?

0 0
Insider Forex Secrets

Insider Forex Secrets

Insider Forex Secrets reveals million dollar banking secrets that will give you enormous power in the Forex currency exchange market reader discretion is advised. Are you tried of going to your regular day job everyday just knowing that your doing nothing more than just working to get by? I know how the 9 to 5 feels and we all know it sucks!

Get My Free Ebook

Post a comment