Hedging instruments for foreign currency risk

With increasing globalization, domestic companies have started trading with a variety of businesses in other countries. The increase in the depth of global economy presents the corporations with a major issue regarding the management of their operations i.e. the management of risk associated with foreign currency exposure.

In particular, many companies implement a risk management structure to insulate themselves against foreign currency exposure utilizing a concept known as Hedging. The process of hedging foreign currency risks involves protecting the business from various losses due to a change in the exchange rate. This paper aims at explaining various types of foreign currency risk, its measurement, various hedging techniques and rules regarding the effect of change in foreign exchange rate and use of forward contract as hedging instrument as per Accounting Standard 11.