Question

One of the financial risk is currency risk. How can we hedge the currency risk

associated with the proposed trade? While you should show familiarity with the

theoretical approach to such hedging, you should primarily focus on practical

implementation of the strategy (what financial instruments and why, where can we

access such instruments, what back office organizational systems do we need for

financial instrument hedging, when should we hedge and why).

THIS IS IN REGARDS TO UBER.

Answer 1

Exchange rate movements impact returns when a change in the value of one currency against another currency leads to a rise or fall in the value of an asset. When an investor buys a domestic asset, the only variable is whether that asset increases in value. But, if they invest abroad, they will have to consider the impact of an exchange rate too.

Currency hedging is an act of entering into a financial contract in order to protect against aniticpated or unexpected changes in currency exchange rates. Currency hedging is used by businesses to eliminate risks they encounter when conducting business internationally.

Following are the ways we can hedge currency risk:

1) Hedging currency risk with specialised ETFs- One way to hedge foreign exchange risk is by investing in a specialised currency traded fund (ETF). A currency ETF functions just like any other ETF, but rather holding stocks or bonds, it holds currency cash deposits or derivative instruments tied to an underlying currency