From the course: Accounting Foundations: Global Finance and Accounting

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Hedging foreign exchange risk

Hedging foreign exchange risk

From the course: Accounting Foundations: Global Finance and Accounting

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Hedging foreign exchange risk

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- Exchange rate risk is the uncertainty about future home country cash flows arising when assets and liabilities are denominated in a foreign currency. Exchange rates change daily, depending on the supply of and demand for particular currencies. supply and demand are affected by inflation rates, interest rates, and other factors in individual countries. Hedging can insulate a company or an individual against foreign currency risk. Broadly defined, hedging is the structuring of transactions to reduce risk. Hedging occurs naturally as part of many business activities. For example, in the retail sale of gasoline, one risk to the gasoline retailer is that movement in worldwide oil prices will cause variation in the cost to purchase gasoline. This cost of goods sold risk is partially offset by the fact that the retail selling price of gasoline also goes up when oil prices rise. So, the increase in the cost is offset by the increase in the selling price. Multinational companies can be…

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