Corporations or individuals dealing in multiple currencies can face significant risk by fluctuating exchange rates. The use of a forex hedge can minimize adverse volatility and provide stability to future earnings and expected cash flows.
While not intended to generate massive profits that might be associated with speculation, hedging foreign exchange exposure can maintain profitability by locking in an exchange rate between the time the hedge is entered and the time the transaction is finalized.
Who Hedges Foreign Exchange?
Currencies can be hedged easily and in multiples of one hundred thousand dollars. Foreign exchange futures are commonly used by corporations who transact in multiple currencies or even individuals with a significant amount of foreign assets. Forex hedging is used to protect from foreign transaction exposure and accounting exposure.