Q1. If an asset is owned in Germany by a US company and the dollar loses value (Euro gains value) then the asset’s value would depreciate on the company’s balance sheet.
Q 2. Foreign exchange risk is present because foreign exchange rates keep on fluctuating.
Q 3. A currency correlation shows the relationship between the values for two currencies.
Q 4. Explain in 2 or 3 paragraphs what hedging is and explain a type of hedge? How does the hedge work?
Hedging is a foreign exchange strategy used by international traders where they aim at limiting losses and remain capable of making profits. It is therefore a way of protecting forex investments against possible losses. This is an essential tool to control fluctuations of asset prices and currency exchange rates especially when the assets are valued using a different currency.
The simple forex hedge- this is a hedging strategy that protects a trader by allow them to trade the opposite direction without necessary closing the initial trade. This helps the traders to keep their initial trade in the market and still make profits with a second trade. When the traders become suspicious of reversal of the market in their favor, they can simply close or stop the hedge.
Hedging works like an insurance cover where a trader is hedged from unexpected huge amount of losses in the future. This is a self-sustaining strategy for traders that help them to remain in the foreign exchange market without making big losses.
