Topic: risk mitigation by various types of hedging. You know you have to purchase a large quantity of some product from Europe a year from now, you face the risk that the value of the euro could increase dramatically, thus costing you a lot of money. Fortunately, there are ways to hedge this risk, so that if the euro does increase relative to the dollar, your hedge minimizes

Topic: risk mitigation by various types of hedging. You know you have to purchase a large quantity of some product from Europe a year from now, you face the risk that the value of the euro could increase dramatically, thus costing you a lot of money. Fortunately, there are ways to hedge this risk, so that if the euro does increase relative to the dollar, your hedge minimizes

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 34QA

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

Topic: risk mitigation by various types of hedging.

You know you have to purchase a large quantity of some product from Europe a year from now, you face the risk that the value of the euro could increase dramatically, thus costing you a lot of money. Fortunately, there are ways to hedge this risk, so that if the euro does increase relative to the dollar, your hedge minimizes your losses.

Question:

What does " if the euro does increase relative to the dollar, your hedge minimizes your losses" mean? What is the further explanation

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