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Forex market and hedging

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Please describe the primary functions of the foreign exchange market. How do global companies use the foreign exchange market to hedge against foreign exchange risks?

Answer should be in narrative form integrating business and risk assessment tools and concepts into professional life. Use examples to suport answer with 1-1.5 pages of written narrative. Thank you.

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How do global companies use the forex market to hedge?

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The FOREX market provides the physical and institutional structure through which the money of one country is exchanged for that of another country. Thus, it facilitates the flow of money between India and Japan, as well as between these nations and other countries that wish to trade with India and Japan.

The FOREX market is the mechanism by which participants transfer purchasing power between countries, obtains or provides credit for international trade, and minimizes exposure to exchange rate risk. Transferring of purchasing power is necessary because international trade and capital transactions normally involve parties in countries with different currencies yet each party wishes to transact in their own currency.

Because the movement of goods between countries takes time, inventory in transit must be financed. The FOREX market provides a source of credit via specialized instruments such as letters of credit . The FOREX market provides "hedging" facilities for transferring foreign exchange risk to someone else more willing to carry that risk.

source: http://www.businessfaculty.utoledo.edu/pkozlowski/FINA3500/ch06.ppt.

Global companies use the foreign exchange market to hedge their foreign exchange risks by using a wide ...

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Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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