- Hedging literally means reducing exposure to risk.
The word is used in share markets, commodity markets and currency markets where the prices are likely to fluctuate.
A contract to SELL a commodity or a currency over the period of time at a particular price leaves the seller in a open position and exposed to price fluctuations. However, this exposure is covered by the act of BUYING a Futures Contract.
- A perfect hedge is basically a no risk no gain precaution.
In Corporate hedging, the corporate treasury officials try to save a firm from the exposure to the foreign exchange risk, maximize forex income and minimize costs. The minimizing of “transactional risks” is the main centerpiece of a Corporate Hedging Policy.
The Reserve Bank of India had issued the first guidelines on Corporate Hedging in 2005. The market determined exchange rates in the country have made the rupee more volatile against the major currencies. The strategy is useful for exim traders, who have to face the unpredictability in the currency movement.