cts of risks and portent losses in foreign exchange transactions, why has the ambit and scope of hedging not also been extended to other forms of speculative business, or even if it has, why is this that it has met only with a limited degree of success and accomplishment?
The hedging strategy enables the investors/company to gain a clear understanding about the happening of the various events that may lead to loss of money for the investors. Foreign currency markets are considered to be very deep, relatively inexpensive and highly liquid where the fund managers are trying to manage their currency options in the foreign investment market. Currency hedging is the most frequently used approach used to manage the degree of risk that is involved in the foreign investment strategies.
Research Hypothesis : Why degree of success of currency hedging cannot be derived from other types of non-currency losses or risks, given that in both cases, there is a great deal of monetary value involved in both speculative and currency transactions.
That being said, it is necessary to first find out what are the relative advantages of using currency hedging during foreign exchange transactions. Currency hedging can be defined as “a particular hedging strategy used to reduce risks in the foreign exchange market.”
We shall consider for a brief moment that there is an importing company in Australia for wheat products, and similarly, there are exporters in London who are shipping the products to Australia. The Australian importing company is worried that if the value of GBP comes down, they would have to pay more for the purchase during future settlement. The current exchange rate is £1 = AUS $ 1.7796. (Market rates, 2009).
If the value of the GBP falls below 1.7796, he would have to pay more AUS $, and then incur losses. The currency exchange fluctuations may be minimal in the event of small transactions, but in the event the import business is for a few billion dollars,