Foreign Currency Hedging Overview
Managing Exchange Rate Risk
Companies often use derivative instruments such as forward contracts, futures, options, or swaps to reduce exposure to exchange rate fluctuations. Hedge accounting attempts to match the timing of gains and losses on the hedge with those of the hedged item.
- Forward contracts.
- Currency futures.
- Currency options.
- Currency swaps.
Note
Detailed hedge accounting rules are less frequently tested than the fundamentals of foreign currency transactions and translation.
Summary
Hedging reduces the financial impact of exchange rate volatility.