Question

How do global firms manage the global financial environment and the foreign exchange market in relation with - Foreign currency derivatives

Answer 1

Answer-

The global firms manage the global financial environment and foreign exchange market by hedging the currency by using derivative instruments.

The foreign currency derivatives are instruments which are commonly used for hedging foreign exchange risk or for currency speculation.

The global firms also use currency currency swaps to eliminate the risk involved in exchange rates.

A swap is a derivative contract through which two parties or global firms exchange the cash flows or liabilities from two different financial instruments.

Swaps generally involve cash flows based on a notional principal amount such as a loan. These are useful when two global firms operating in two different countries want to eliminate the fluctuations in their respective currencies.