Chapter 17 Hedging in foreign exchange using five different approaches. Hedging means balancing assets and liabilities in foreign currencies to avoid exchange rate risk exposure. The majority of exchange rate movements are difficult if not impossible to predict. If your wealth might change because of movements in exchange rates, you are exposed to exchange rate risk.
Forward markets are part of the banking system.
This type of contract enables a company or an individual who has a future commitment in a foreign currency to eliminate the risk of an adverse move in the rate of exchange prior the maturity of the commitment. Forward exchange rates are usually quoted in terms of their premium or discount over the spot rate. As described above, there is a specific exchange rate for each forward contract and that rate will usually differ from the spot exchange rate. If the forward exchange rate for a currency is higher than the current spot rate of the same currency, the currency is said to be trading at a premium for the forward maturity. If the forward rate is below the spot rate, the currency is said to be trading at a discount.