Defining Hedging in Foreign Exchange
Hedging in the foreign exchange market is a strategy used to protect against potential losses that may arise from fluctuations in currency exchange rates.
Analyzing the Options
- Option 1: An act of devaluation. This is incorrect. Devaluation is a deliberate downward adjustment of a country's currency value, whereas hedging is a risk management technique.
- Option 2: Not covering a risk of foreign exchange in future. This is the opposite of hedging. Hedging aims to manage and reduce future risks.
- Option 3: Covering a risk of foreign exchange in future. This correctly defines hedging. It involves taking specific actions to offset the potential negative impact of future exchange rate movements.
- Option 4: None of the above. This is incorrect because Option 3 accurately describes hedging.
Conclusion on Hedging
Therefore, the primary purpose of hedging in the foreign exchange market is to secure protection against future currency risks.
Important Questions from Foreign exchange market
Currency depreciation in the Indian Rupee in recent times has largely been attributed to:
A. Declining domestic savings
B. Increasing FDI flows
C. Portfolio outflows
D. Higher currency circulation
E. Higher imports and debt servicing
Choose the correct answer from the options given below:
Match the items of List I with the items of List II and choose the correct answer from the code given below.
List – I
List – II
a
Floating forex rate
i
Get the best out of extreme decentralisation and centralisation in finance decision and execution
b
Transaction effect of change in forex rate
ii
Influences time lag in receipt of cash against foreign currency denominated invoices
c
Transaction effect of fluctuation in forex rate
iii
Influences the valuation of financial statements and reported items
d
Geocentric solution in financial planning and control
iv
Triggers problems of appreciation or depreciation of currencies
- Which one of the following instruments is often used to protect the value of a foreign currency denominated transaction?
- Which of the following is related with optimum currency area ?
Match the following :
List – I List – II a. Banks that conduct trading in market for Euro currencies 1. Euro currencies b. Deposits denominated and payable in dollars and other foreign currencies in banks outside USA 2. SDRs c. Dollar deposits located in banks outside US 3. Euro banks d. Currency baskets composed of five currencies of IMF members 4. Euro dollars
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