Currency Futures & Hedging Basics

What this unit covers

Learn how a real business hedges currency risk with a futures contract, and why hedging, like every defined-risk structure, gives up the good move to protect against the bad one.

By the end you will be able to

• Explain how a currency futures contract fixes today's rate for a future payment.
• Compare a hedged receipt against an unhedged one when the rate moves either way.
• Judge a hedging decision by its reasoning at the time, not by the later outcome.

How it starts: Waiting on a Payment

1. A business is due 1,00,000 dollars from a buyer abroad in three months.
2. You can lock in today's rate now, or wait for whatever rate arrives later.
3. Which choice actually removes the risk, and what does it cost you?

Words you will meet

Currency futures

A contract that fixes an exchange rate today for currency exchanged on a set future date.

Hedging

Taking a position to reduce the risk of an unfavorable price move elsewhere in your finances.

Spot rate

The exchange rate at which a currency trades right now, for immediate exchange.

In this module: Currency Markets

1. What Is Forex?
2. Major Currency Pairs
3. Why Exchange Rates Change
4. Currency Futures & Hedging Basics (this unit)