Question

Discuss the extent to how Currency forwards can be employed to hedge currency risk management on the stock exchange market of Mauritius.

Answer 1

Q: How Currency Forwards can hedge currency risk in Foreign exchange market like Mauritius Market?

Currency Risk:- It is the risk associated with currency with which investors or trader do transactions or investment, that currency has a chance to depreciates or appreciates with respect to market functions. This pose a threat to investor if that particular currency with which investor buy or sell his units depreciates at current exchange time. It gives you loss or if not happens it can give you gain.

Hence currency risk management which is otherwise called as hedging currency is a great thought for investors at the time of exchanging currencies. This concept occurred in every stock exchange market whether it is foreign or domestic market, whether it is indian stock market or Mauritius stock market, The fundamental of currency exchange risk and hedging of it is same rule for all.

Currency Forwards:- A currency forwards is contract in the foreign exchange market locks in the exchange rate for purchase or sale of currency in the future date.

How it hedges currency risk;- It is very obvius that when you fix your currency transaction to a future date , when currency depreciates or appreciates at that particular time you wont be at loss or gain, you will do transaction with your pre fixed currency rate.

So it manages fluctuation of currency very simply for investors. It is hedging tool that doesnot invole margin payments at the time of exchange of currencies in future date.