What is currency hedging?
Businesses use hedging as a form of insurance to protect themselves against changes in circumstances that are out of their control i.e. interest rate rises, or rising costs of materials. Currency hedging relates specifically to foreign exchange rates.
Where have you heard about currency hedging?
The phrase hedging your bets is commonly used. Currency traders, businesses which export to/do business with other countries and pension providers all use currency hedging to protect against fluctuations in Foreign Exchange (FX).
What you need to know about currency hedging.
Companies use it to guarantee the exchange rate with the country with whom they're doing business for a fixed period of time even if the exchange rate fluctuates. A British firm with business interests in the US would, for example, be able to fix the pound-to-dollar exchange rate of £1-$1.25 for a period. It's done by taking out what's known as a futures contract.
Methods of currency hedging include spot contracts, with a short-term delivery dates, and foreign currency option, where the purchaser has the right but not the obligation to buy or sell a currency pair at a set exchange rate at some point in the future.
Find out more about currency hedging.
Currency hedging is just one type of hedging. Shares, bonds, commodities can all be hedged. Explore hedging.