Hedging

• Overall


  Process of minimising the risk of currency fluctuations

  When 2 parties agree to exchange currency and finalise a deal immediately, it’s called a spot exchange rate

  Spot exchange rate is the value of one currency in another currency on a particular day, but exchange rates change constantly so can be a concern if there is an increase in costs, therefore leading a reduction in profits
• Minimising risk


  It is possible for businesses to minimise the risk with currency fluctuations and it’s called hedging

  It refers to the process of minimising risk of currency fluctuations to help reduce the level of uncertainty involved with international financial transactions
• Natural Hedging


  Practices a business implements to minimise risk

  May adopt a number of strategies to eliminate or minimise the risk fo foreign exchange exposure, e.g. offshore subsidiaries, arrange import payments and export receipts denominatied in the smae foreign currency and implementing marketing strategies that attempt to reduce price sensitivity and insist both contacts are in aussie dollars

  Open branch in foreign country, removing the need to exchange

  Imports payments in same currency

  Increase price to cover exchange rate losses