The Instruments Commonly Used for Hedging

Abstract

The hedge of course works by creating an offsetting exposure. If your cash flows move in one direction because of an exchange rate surprise, hedging implies that you also have a contract, the value of which moves in the opposite direction. You create an offsetting exposure. In this chapter we will introduce the most commonly used financial instruments available for hedging currency exposure. The instruments which we will explain are forwards, futures, options, and swaps. For a more comprehensive guide we refer the reader to any of the textbooks mentioned in the introduction, which typically have this as their main focus.