Question

Scenario: Trader's Paradise Trader's Paradise is a global merchant that sells a variety of products. The company operates in forty-eight different countries (some developed, some developing) and some former communist countries. The company faces substantial risks given the differing conditions in foreign exchange markets. If Trader's Paradise purchases euros expecting the value to rise and generate a profit for the company, it is engaging in currency ________.

Answer 1

Answer: Hedging

Explanation: Trader's Paradise is engaging in currency hedging when it purchases one currency with hopes to profit from its rise in value. Hedging helps reduce one's exposure to risks. Currency hedging can be defined as the process of entering into a financial contract or arrangement in order to protect against unexpected, expected or anticipated price movements or interest rates in currencies. Predictability of exchange rates however, reduces the need for currency hedging.