Hedging & FX risk

Currency risk arises when relevant cash flows, assets or obligations respond differently to exchange rates. Hedges can reduce specified exposures, but a cross-border transaction does not necessarily create an unhedged currency mismatch.

Hedging & FX risk in practice

Hypothetical: debt service is in U.S. dollars while the cash available to pay it is in Korean won. Assess target cash flows and any natural offsets before sizing a hedge. A forward fixes an exchange rate for a defined amount and date; an option provides specified protection for a premium.

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