http://www.investopedia.com/terms/f/fore...
It is not clear what you don't understand about hedging. A hedge simply protects an investor from various types of risk. If you own Apple stock, you might buy an Apple put option to hedge the downside risk, rather than use a stop loss order.
Hedging Basics: What Is A Hedge?
http://www.investopedia.com/articles/opt...
A company is exposed to currency risk when income earned abroad is converted into the money of the domestic country, and when payables are converted from the domestic currency to the foreign currency.
Example: Japan wants to sell 1,000 pencils in America for $1 each. They ship their pencils on a ship that takes 30 days to arrive.
During the 30 day transport, the USD increases in value or the JPY (Yen) decreases in value, or both. Because of the normal fluctuation in the currency exchange rate, a pencil is worth less than $1, and the Japanese company loses money on the sale of their pencils.
Currency translations are big risks for companies that conduct business across borders. Obviously, there is no risk in a greater profit, so the hedge is against the risk of loss due to currency fluctuation.
When you take out insurance to minimize the risk that an injury will erase your income, or you buy life insurance to support your family in the case of your death, this is a hedge. Hedging is about decreasing or transferring risk.
A Forex hedge is defined here:
Definition of 'Forex Hedge'
http://www.investopedia.com/terms/forex/...
In the above example of selling pencils. the Japanese company is long Yen, so they could simply buy USD/JPY, but this would not be an effective hedge over long periods of time. The currency swap is the preferred method of hedging currency risk between companies in different countries.
Hedging With Currency Swaps
http://www.investopedia.com/articles/for...
Hedging is to protect yourself from potential losses by buying an investment that reacts in the opposite way to the investment you are trying to hedge. Let's say you were long of equities but thought there was some risk of a downturn in equities. You may feel that in a downturn in equities then the value of gold may go up.
So you buy gold to hedge your potential losses in equities (the value of your equity portfolio goes down but the value of your gold goes up)
In Laymans terms what does this mean? Such as material firm transactions? material foreign exchange currencies? Thanks
Mitigation: In order to protect itself against currency
fluctuations, the Group’s policy is to hedge all material
firm transactional exposures, unless otherwise approved
as an exception by the Treasury Review Management
Committee, as well as to manage anticipated economic
cash flow exposures over the medium term. The Group
aims, where possible, to apply hedge accounting
treatment for all derivatives that hedge material foreign
currency exposures. The Group does not hedge the
translation effect of exchange rate movements on
the income statement or balance sheet of overseas
subsidiaries and equity accounted investments
it regards as long-term investments. Hedges are,
however, undertaken in respect of investments that
are not considered long-term or core to the Group
