Hedge
A hedge is a type of derivative, or a financial instrument, that derives its value from an underlying asset. This concept is important and will be discussed later. Hedging is a way for a company to minimize or eliminate foreign exchange risk. Two common hedges are forwards and options. A Forward contract will lock in an exchange rate at which the transaction will occur in the future. An option sets a rate at which the company may choose to exchange currencies. If the current exchange rate is more favorable, then the company will not exercise this option.
Read more about this topic: Foreign Exchange Hedge
Famous quotes containing the word hedge:
“There’s such divinity doth hedge a king
That treason can but peep to what it would,
Acts little of his will.”
—William Shakespeare (1564–1616)
“Though bachelors be the strongest stakes, married men are the best binders, in the hedge of the commonwealth.”
—Thomas Fuller (1608–1661)
“Take the instant way,
For honor travels in a strait so narrow,
Where one but goes abreast. Keep then the path,
For emulation hath a thousand sons
That one by one pursue. If you give way,
Or hedge aside from the direct forthright,
Like to an entered tide, they all rush by
And leave you hindmost.”
—William Shakespeare (1564–1616)