Forward Contract For Hedging
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FAQ
Forward contract is used for hedging the foreign exchange risk for future settlement. For example, An importer or exporter having FX contract limit may lock in current exchange rate by entering into forward contract with the bank to avoid adverse rate movement.
Forward market hedging is a maneuver to protect against loss in the event of a drop in or weakening of assets, interest rates or currency, but hedging is not without risk as an entity in the forward market may find they have over-hedged (creating a liability, or debt) or under-hedged (thus accruing profit loss).
Money Market HedgeBorrow the foreign currency in an amount equivalent to the present value of the receivable.Convert the foreign currency into domestic currency at the spot exchange rate.Place the domestic currency on deposit at the prevailing interest rate.More items...
Hedging is accomplished by purchasing an offsetting currency exposure. For example, if a company has a liability to deliver 1 million euros in six months, it can hedge this risk by entering into a contract to purchase 1 million euros on the same date, so that it can buy and sell in the same currency on the same date.
Companies that have exposure to foreign markets can often hedge their risk with currency swap forward contracts. Many funds and ETFs also hedge currency risk using forward contracts. A currency forward contract, or currency forward, allows the purchaser to lock in the price they pay for a currency.