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What is the purpose of hedging in global money market?

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2005-11-22 15:41:58
2005-11-22 15:41:58

Assuming that you mean currency hedging - it is to make extra money! By pricing a transaction in one currency or the other, you are in essence gambling that you know which way the currency rate will go. Example: I want to buy $100 of Philippine mangoes, which buys 500 mangoes. The Dollar today is worth a bit over 54 Pesos (fractions ignored). If I make the deal in US dollars, I know my expense will be $100, and I will get 500 mangoes for them. If I want, I can lock in those values today. If I think the Philippine Peso will be going down in value, I can price those 500 mangoes at 5400 Pesos at close of transaction. If that time comes and the I can now get 65 Pesos for each US dollar, then divide 65 into 5400 means I spend only a bit over 83 US dollars for the same amount of mangoes. Realize that it is a gamble - guess wrong and it could also make those mangoes much more expensive!

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