The word “hedging” has a negative connotation with some people, maybe because it brings to mind high-risk or complicated hedge fund strategies. But currency hedging is a straightforward management practice for reducing or eliminating foreign exchange (FX) currency risk, like an insurance policy a company can buy to protect its profits from FX movements. Chief financial officers can protect their companies’ bottom lines by developing currency-hedging strategies that fit their buying and selling activity in foreign countries.
For many U.S. companies that sold products in Europe in the first half of 2018, 10 percent on the exchange rate held the potential to wipe out their profits or bust their budgets. That’s how much the U.S. dollar-Euro exchange rate swung, from a high of $1.25 per Euro in February to a low of $1.13 per Euro in June. When a U.S. company commits to a future transaction where foreign currency is paid or received, that company runs the risk of losing money if the value of the currency changes before payment is made or received.
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