Online Class Room provides simple illustration of concepts and ideas related with Indian economy. Hedging is measure usually taken by a firm or individual as a cover against future potential adverse events.

It is like an insurance against economic or financial risk that may occur in future. There are several types of hedging. An important one is the currency hedging where an entity or person dealing with foreign currencies takes safe measures against exchange rate fluctuations. These groups need foreign currency or sells foreign currency in future to meet their trade and investment needs.

Corporate Hedging for Foreign Exchange Risk in India | Hedge (Finance) | Futures Contract

For example, any depreciation of rupee becomes loss incurring for importers as it raises the price of the imported commodity in terms of the domestic currency. Similarly, any appreciation of rupee will be loss making for exporters as it reduces the export price of a commodity in domestic currency.

Hence, to ensure that rupee into dollar and dollar into rupee are made at the fixed exchange rate; whatever happens to the market exchange rate in future, these people can resort to some measures where they can get their preferred currencies at an assured exchange rate.

Hedge funds are institutions who buy and sell foreign currency from the customers traders and foreign investors at a fixed rate on an agreed future date. Similarly, there are other facilities like currency futures a type of currency derivative which gives opportunity for investors to hedge their currency.

Here, he may have incurred some losses because of the exchange rate fluctuations. To overcome the situation, the exporter can hedge his position by signing a contract with financial institutions providing hedging services. All these are examples for currency hedging. Sign In Register About Us Contact Us. Pirates in the internet ocean. Today's Classroom 06 Jul by Tojo Jose What is Currency Hedging?

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Currency hedging is covering the foreign exchange risk. Here is an illustration of currency hedging.

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