Foreign Exchange Mechanisms Paper - Currency HedgingForeign Exchange Mechanisms Paper - Currency HedgingCurrency hedging involves deliberately taking on a new risk that offsets an existing risk, thereby reducing a company's exposure to a negative change in exchange rates, interest rates or commodity prices (Economists.com, n.d.). “Foreign exchange hedging allows a business owner to significantly reduce or eliminate the uncertainties associated with any foreign currency transaction” (Fraser, 2001). It is impossible to predict the value of a currency on the exact day a company converts it. With the cover, the uncertainty disappeared. Many companies with international operations are constantly juggling multiple transactions, with staggered payments and linked to fluctuations in a number of currencies. There are a growing number of banks as well as business-to-business websites that offer foreign exchange hedging, regardless of the company. size. In the past, the only way to truly avoid currency fluctuation risk was to transact all international transactions in U.S. dollars. For small businesses, in particular, it would be difficult to emphasize these terms (Economists.com, nd). There are a number of currency hedges, including: the spot contract; futures transactions; choice ; currency swaps; and non-deliverable futures (Wachovia, nd). Spot contracts are a way to convert another country's currencies into U.S. dollars or make a payment in foreign currencies. Currency can be purchased at the daily exchange rate and, in most cases, final settlement occurs within two days. Futures trading is very popular, especially for those new to currency hedging. Forward trading allows a company to buy or sell a currency...... middle of paper ..., all international trade transactions would be paid in US dollars and there would be no need for hedging exchange rate. Unfortunately, many customers and suppliers will not agree to these terms. Businesses hoping to successfully operate internationally would do well to fully educate themselves on the benefits that foreign exchange hedging offers. ReferencesEconomists.com (nd). AZ Economy. Retrieved October 4, 2005, from http://www.economist.com/research/Economics/alphabetic.cfm?TERM=HEDGEFraser, JA (March 2001). Follow the big guys. Inc. Magazine, , . Retrieved October 4, 2005 from http://www.inc.com/magazine/20010301/22118.html Hill, C. (2003). International Business: Competing in the Global Marketplace (3rd ed.). New York: The McGraw-Hill Companies. Wachovia (nd). Foreign exchange hedging tools. Retrieved October 3, 2005 from www.wachovia.com