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.


24 thoughts on “Foreign Exchange Hedging, James Tompkins”

  • Li Ying(701088)I'm quite grateful to master the definition of the hedging and its goal that it is applied in order to offset foreign exchange risk. Furthermore, I know how the hedging in theory create the value by means of those examples. Last but not least, I learned both the advantages and disadvantages of the hedging, otherwise, it should be applied in different ways based on wether in long run or short run.

  • Xing Mengna(701087)It's useful for us to have a better know about the hedging,such as the goal ,key principle and so on.We've known that hedging applies just to the short term, as well as the definition of the transaction exposure.In a word, hedging can't be applied anytime you would like to use, for the sake of fact that it holds both advantages and disadvantages.

  • CUIYOUWEN(701139) According to this video,I`ve learned some new concept. First, I know the goal of hedging is to eliminate risk in short term. And is the risk about unexpected affairs. The one key principle behind hedging is to simply take an equal and opposite on your transaction. Second, I check "transaction exposure" on google, found that transaction exposure is the risk, faced by companies involved in international trade, that  currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms. Based on the video, I`ve learned that we can`t be subject to transaction exposure when there is not a credit transaction. Third, I`ve learned 8 example of hedging, and have deep understanding of this concept.

  • Chen XiXue(701138)
    I have learned a lot about Foreign exchange hedging. Sir gave detailed introduction and use some hedging example, such as using a forward contract, using a futures contract or using an options contract and so on. With some calculations and asked more questions in the each topic. Hedging has value increasing benefits in the real world, yet many large companies choose not to hedge. and it’s good to do the exposure netting. It was very helpful! Thank you so much.

  • Sir, it has great learning experience till now and I am really thankful to you for the same.
    Also, can you make an another, an individual video in which give you can explain on transitions in the exchange rate system from the initial period.


  • Nice job James, very insightful. Would it be fair to say that only period to period risk can be hedged away with these methods? If I hedge out 90 days surely I can remove the 3 month risk of fx volatility. But then the next 3 months derivatives will be a function of the then current spot. So over time in an depreciating Euro environment, my business can still suffer if I have sustained and significant long euro positions regardless of hedging. What are companies doing to hedge the long run? thanks!

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