What is a money market hedge and what is an option hedge?

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A money market hedge is a system whereby the rate of a foreign currency deal is used to set the value of the organization's domestic currency. This structure helps the domestic company reduce its risk when doing business with a foreign company or organization. By locking in the value ahead...

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A money market hedge is a system whereby the rate of a foreign currency deal is used to set the value of the organization's domestic currency. This structure helps the domestic company reduce its risk when doing business with a foreign company or organization. By locking in the value ahead of time (before the transaction), the domestic company is then more secure doing business with foreign organizations in the future. An option hedge is sort of like an insurance policy on an investment, and it may be useful if an investor is concerned that an initial expenditure may not pay off as previously expected. Option hedges differ slightly from insurance policies in that they require the investor to make an investment with the specific intent to offset potential losses on the original purchase. The downside of hedging is the possible loss of profits; the benefit is that the stockholder is protected should a risky transaction go awry.

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