What is Currency Hedging? - Definition, Example & Risk


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What do you call the designation of one or more financial instruments so that the change in the fair value or cash flows of the derivative will offset, in whole or in part, the change in fair value or cash flows of a hedged item?

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1. What is the financial risk pertaining to the possibility of a contract being dishonored?

2. What is the financial risk that refers to the uncertainty over future interest rates and their impact on the company's future cash flows and the fair value of the financial instrument?

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About This Quiz & Worksheet

These questions let you see what you know about currency hedging. Make sure you can explain how this type of financial action is carried out.

Quiz & Worksheet Goals

In this quiz/worksheet set you'll measure your knowledge of:

  • Hedges created based on existing assets/liabilities
  • Different types of financial risks when dealing in currency transactions
  • The hedge created when two parties agree to specific terms on a specific date

Skills Practiced

  • Critical thinking - apply relevant concepts to examine information about hedging in a different light
  • Information recall - access the knowledge you've gained regarding what kinds of risks a bank or other investor faces
  • Knowledge application - use your knowledge to answer questions about different types of hedges based on the actions being taken

Additional Learning

For a more complete understanding of this type of financial action, read the lesson titled What is Currency Hedging? - Definition, Example & Risk. This lesson covers important topics like:

  • Exchange rates
  • Cash flow hedges
  • Foreign currency risk