definition. A foreign exchange hedge is a type of financial derivative, which gives companies a means of eradicating, or “hedging”, their cash flows against foreign exchange risk. The most popular hedging products include forward contracts, futures and options.
Should I hedge currency risk?
Currency’s movements (and how they move with equities) are incredibly difficult to predict, so investors should treat currency hedging as a way to manage risk, not add return. It is not a one size fits all decision – and one that should be made after building a plan, establishing an asset allocation, and managing cost.
Why hedging foreign currency risk is important?
Minimizing Currency Risk Despite the perceived dangers of foreign investing, an investor may reduce the risk of loss from fluctuations in exchange rates by hedging with currency futures. Simply stated, hedging involves taking on one risk to offset another.