Question

The decision to hedge or not hedge depends upon what factors for a firm with foreign exchange exposure (risk).

Answer 1

Exchange rate fluctuation is an everyday occurrence. From the holidaymaker planning a trip abroad and wondering when and how to obtain local currency to the multinational organization buying and selling in multiple countries, the impact of getting it wrong can be substantial.During my first overseas assignment in the late 1990s and early 2000s, I came to work in Hungary, a country experiencing a huge transformation following the regime change of 1989, but one in which foreign investors were keen to invest. The transition to a market economy generated significant currency volatility, as the chart below highlights. The Hungarian Forint (HUF) lost 50% of its value against the USD between 1998 and 2001 and then regained it all by the end of 2004 (with significant fluctuations along the way).