what is currency hedging?

Answer 1

Typically, a hedger might invest in a security that he believes is under-priced relative to its "fair value" (for example a mortgage loan that he is then making), and combine this with a short sale of a related security or securities. Thus the hedger doesn't care whether the market as a whole goes up or down in value, only whether the under-priced security appreciates relative to the hedge.

Answer 2

Let's say most of your sales were in the US and these receivables are net 30. In the next thirty days you are worried that the dollar will fall. So you can take out an option to buy your currency, say Yen, at some specified price in dollars today for a future time, 30 days. If the dollar falls you still get what you expected, minus the costs and spread. If the dollars stays the same or rises your option expires and it worthless. But your dollars have gone up in value or stayed the same. It should be thought of as insurance which you pay for and hope you never have to use. But some people speculate, I have and lost a modest amount of money.

Answer 3

say a us company does business with japan...the us co. knows it makes 10% profit on its goods. But it worries that the currency trade of dollar/yen may move against it while the product is being manufactured or shipped. So they buy or sell futures of yen to lock in todays price of exchange, guaranteeing them the 10%. Traders in the futures market take on the risk, hoping to profit from the same exchange rate movement that the company avoided.