How Firm Can Hedge from Currency Risk

Foreign currency hedging provides certainty of cash flow, because it reduces the risk associated with the volatility of currency exchange rate. The hedging has become important element in these last months, given the strong volatility that is undergoing the euro against the dollar, as consequence of the severe financial crisis which is affecting Europe. On this basis, the main objective of the paper is to give an analysis of the principal instruments that firm can use in its strategies of currency hedging, highlighting the most important elements in choosing the hedging policy. Indeed, the managers choose the hedging policies, considering on the characteristics of cash flow exposed to currency risk and given their forecast on the exchange. It is aid that, the paper examines the different effects that the hedging instruments may determine on a given numeral example of firm exposed to foreign exchange risk. In order to demonstrate that, the optimization of the hedging strategies depends on the ability of managers to forecast the future trend of the exchange rate and to adapt the most appropriate hedging instruments to these forecasts