How Can Firms Hedge Against Foreign Exchange Risk?
The foreign exchange market provides insurance to protect against foreign exchange risk - the possibility that predicted changes in future exchange rates will have adverse consequences for the firm
A firm that insures itself against foreign exchange risk is hedging (to reduce the risk of losing or making a mistake by having several choices available to you)
To insure or hedge against a possible adverse foreign exchange rate movement, firms engage in forward exchanges - two parties agree to exchange currency and execute the deal at some specific date in the future