Assume that John own a company with fx exposure, how John using forward contract to hedge...

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Assume that John own a company with fx exposure, how John usingforward contract to hedge the foreign exchange rate risk.Illustrate it with a scenario.

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Risk is a probability of unfavorable outcome An entrepreneur has to safeguard its business against multiple risks in todays environment to be competitive and efficient Risks are many and numerous Its nearly impossible to anticipate all the risks measure them and mitigate them However we can understand them and take an informed call or decision to mitigate them or get rid of them or to go ahead with them Hedging refers to taking offsetting position in two separate but related financial instruments such that the impact of the risk factor is mitigated or eliminated A very simple example is Say a company completes a delivery today but payment will be received in a foreign currency a month later but based on exchange rate today A company should immediately hedge this position by entering into a transaction where payment by it has to be made in the same foreign currency a month later but based on exchange rate today If this happens the company receives payments in the foreign currency a month later and pays out the same amount in the second transaction thus without incurring any gains losses due to exchange rate fluctuation Hedging can be natural or intellectual man made An artificial hedge is by taking the offsetting position in derivative market by making use of options futures forwards or even swaps Hedging can be used to manage risks arising due to fluctuations in prices interest rate or foreign exchange rates Commonly used instruments are future contracts options Call and Put option on the stock of two See Answer

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