Currency Risk – Hedging

Hedging against Currency Risk

Movements in exchange rate can affect the profitability of firms. For example, an appreciation in the exchange rate, could undermine the profitability of exports. Therefore, large exporting firms are likely to hedge against an appreciation. This means that they may reserve the right to buy / sell currency at a certain fixed price. Thus for a small fee, they can protect against unwarranted movements in the exchange rate.

Hedge funds can also turn currency trading into a risky investment by taking short positions and selling currency they don’t have. Options such as this can have exponential losses.

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