Hedging is a term for a financial instrument, financial service, which serves as a security against currency risk. It is a hedge against currencies fluctuation in foreign trade. Its principle is that when the exporter knows that he will have to pay in foreign currency, where there is a rate fluctuation, he agrees to the current exchange rate and with this rate will pay his obligation in the future.
What is hedging for in practice?
Hedging is most commonly used in international trade as a financial instrument to secure future prices of traded goods. It is used by importers and exporters to reduce the risks of adverse exchange rate fluctuations, when collecting debts or paying liabilities denominated in foreign currencies. With hedging, they cut unnecessary costs caused by exchange rate differences. Hedging is offered by banks and other financial institutions.