Currency hedging

Currency hedging is a strategy used by businesses or investors to protect themselves from the risk of currency exchange rate fluctuations. For example, if a U.S. company expects to receive payment in Euros in the future, but fears the Euro might weaken against the dollar, they can use hedging techniques like forward contracts to lock in a current exchange rate. This ensures they know exactly how much they will receive, reducing uncertainty and potential financial loss due to currency movements. Essentially, hedging acts as a safeguard against unpredictable currency changes.