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Chapter 16: Q.13 (page 406)

What does it mean to hedge a financial transaction?

Short Answer

Expert verified

To participate in a monetary exchange that lessens or dispenses with hazard.

Step by step solution

01

Concept

Several risks are involved in making investments and financial transactions. the value of an asset make decline and the investors may have to incur a loss. Investors often take certain steps to protect themselves from such risks.

02

Step 2:- Explanation 

Hedging is a method or tool used to reduce the risk of loosing money when making an investment or financial transaction. The process of hedging involves protecting trnasactions thorrugh tools such as insurance, options, swaps, stocks, etc.

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Most popular questions from this chapter

Suppose that political unrest in Egypt leads financial markets to anticipate a depreciation in the Egyptian pound. How will that affect the demand for pounds, supply of pounds, and exchange rate for pounds compared to, say, U.S. dollars?

Is a country for which imports and exports comprise a large fraction of the GDP more likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rate?

How will a stronger euro affect the following economic agents?

a. A British exporter to Germany.

b. A Dutch tourist visiting Chile.

c. A Greek bank investing in a Canadian government bond.

d. A French exporter to Germany.

Does a higher inflation rate in an economy, other things being equal, affect the exchange rate of its currency? If so, how?

This chapter has explained that “one of the most economically destructive effects of exchange rate fluctuations can happen through the banking system,” if banks borrow from abroad to lend domestically. Why is this less likely to be a problem for the U.S. banking system?
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