Currency Hedging

Running Head: CURRENCY HEDGING

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Currency Hedging

Currency Hedging

Currency hedging is an approach that is used to manage the degree of risk that can be present when conducting business in a global investment strategy. The hedging process is an essential tool in evaluating the risks in the shifts in the foreign exchange market in a business venture outside of the business’s country of residence. The goal of hedging is to minimize the risk occurred when a business deals with foreign currency exchange rates.

Hedging Strategy

It is important to use a hedging strategy to eliminate currency exposure and the risk associated with currency movement. Fortunately, a number of tools for hedging foreign exchange risk currently exist. Certain risk strategies involve finding a way to buy foreign currency presently at today's exchange rate. This practice will enable the business to know what the costs are currently and have a sound basis on which to set the price of the company’s products and services. Hedging is also used as an approach to find a way to gain the right to buy foreign currency at a later date at the current fixed exchange rate (Oanda Corporation, 2010).

Hedging allows the business to manage the risk and reduce potential risk. If the business does not hedge, it is equivalent to speculating that the foreign currency rate will remain the same. If the rate results in moving unfavorably, the business’s speculation can be quite costly.

Fluctuation in currency is typical and a business needs to minimize the risk of the value of the currency at the time of the business agreement because the business cannot project the same costs as forecasted if the currency rate in...