Answer to Question #239525 in Economics for Kim Alleyne

Question

Gund is a company producing plush stuffed animals, based in New Jersey, United States. It has recently signed a contract to deliver 100,000 Itty Bitty Boo stuffed unicorns, at €11 apiece, which represents 5% profit for the company.The whole sum of €1,100,000 will be paid at the time of delivery in 6 months. But Gund’s CFO, Chris Jasko, is worried. USD/EUR exchange rate has been very volatile lately, and if the U.S. dollar straightens more than 5%, the whole deal will produce a loss. Help Chris with this problem and design a hedging strategy.

Answer 1

Hedging is the process of protecting assets from possible risks. This usually means using multiple instruments to offset or balance the current trading position in order to reduce the overall risk.

The most common simple strategy is called "direct hedging". For example, when a trader already has a long position in a certain currency pair, and then simultaneously takes a short position in the same asset.