Foreign Exchange Hedging, James Tompkins

This is the eleventh lecture in the "International Finance" series in which I discuss how corporations and other entities can protect themselves from unexpected exchange rate movements. So far this class has been about obtaining an in-depth understanding as to why and how different currencies move up and down in value. To the extent that unexpected exchange rate movements are a risk, we now look at managing this risk. In particular, in this lecture, we look at managing this risk in the short term. My approach is to use a very simple example, and for the same example explore different alternatives to hedging including the use of forwards, futures, options, money market hedges and others. The goal is not only to understand how each hedge works, but the advantages and disadvantages of each.