Final answer:
Firms hedge to protect against currency exposure, guaranteeing an exchange rate for future transactions and mitigating the risk of currency devaluation.
Step-by-step explanation:
Under its 2015 financial policy, Electrolux is hedging transaction exposure as it is trying to protect itself from movements in exchange rates related to exporting products to France. When parties wish to enter financial contracts like hedging to protect themselves against exchange rate movements, they normally rely on a financial institution or brokerage company to handle the hedging.
Under its 2016 financial policy
Firms engage in various types of financial transactions to protect themselves from movements in exchange rates. When a U.S. firm that exports to France receives a contract priced in euros, they face a currency exposure because the future value of the contract in U.S. dollars is uncertain due to potential fluctuations in the euro/dollar exchange rate. To mitigate this risk, the firm can hedge by entering into a financial contract that guarantees an exchange rate in the future, for a fee, thus protecting their investment against devaluation of the euro against the dollar. Translation and operating exposures relate to the impact of exchange rate changes on a company's consolidated financial statements and ongoing foreign operations, respectively.