What is a hedge transaction?

Where a spot transaction is an immediate converstion, a hedge transaction is a conversion set for a future date.  A hedge transaction in foreign exchange is a financial strategy used to protect against currency exchange rate fluctuations. Businesses use this tool to minimize the risk of potential losses due to currency value changes.

For example, a company might use a hedge transaction to secure a fixed exchange rate for an invoice in a different currency, if received today but not due for 90 days.  The user would "lock-in" a competitive rate for 90 days in the future and funds would not be required until that time.  Exchange rates over this time in some cases can fluctuate anywhere from 7% to 30% or more depending on the currency pair in question, so locking in removes the stress of potential losses and margin erosion.  These strategies have proven to secure profit margin and improve working capital.