Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure.Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

Question

Quizplus · Accepted Answer

Forward currency contracts allow individuals and corporations to lock in an exchange rate for a future date, which is used to hedge against exchange rate fluctuations. However, the strategy does not necessarily involve simultaneously selling the currency expected to appreciate and buying the currency expected to depreciate. Instead, it involves agreeing to exchange currencies at a future date at a predetermined rate, which could be for either buying or selling a currency based on the hedging needs.

Individuals and Corporations Can Buy or Sell Forward Currencies to Hedge