Question

Discuss some of the common situations in which a forward exchange contract can be used as a hedge?

Answer 1

Forward contract is a contract in which buy and sell of assets pre-specified price at a specific date in the future.Generally valid upto 12 months in the future.

Forward contracts are not traded on exchanges, and standard amounts of currency are not traded in these agreements.These contracts always take place on a date after the date that the spot contract settles and are used to protect the buyer from fluctuations in currency prices.there are four major pair ,These are the U.S. dollar and euros; the U.S. dollar and Japanese yen; the U.S. dollar and the British pound sterling; and the U.S. dollar and the Swiss franc.

Yes forward exchange contact used as a Hedge. Forward contracts are a type of hedging product. They allowed business to protect itself from currency market volatility by fixing the rate of exchange over a set period on a pre-determined volume of currency. hedge are a financial strategy that should be understood , used by investors because of the advantages it offers.

Types of hedging-

1.Forward exchange contract for currencies.

2.Currency future contracts.

3.Money Market Operations for currencies.

4.Forward Exchange Contract for interest.

5.Money Market Operations for interest.

6.Future contracts for interest.

( and many more).

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