What is the purpose of hedging in international business?

Hedging in international business primarily serves to protect against potential foreign exchange (FX) losses caused by fluctuations in currency values. Companies that operate globally face the risk that changes in exchange rates could negatively impact their profits, pricing, and competitiveness in foreign markets. By employing various hedging strategies, such as forward contracts, options, or swaps, businesses can lock in exchange rates or mitigate potential risks associated with unfavorable currency movements. This proactive approach allows companies to manage their financial exposure effectively, ensuring more predictable and stable financial outcomes amidst the volatility of the international markets.

While hedging may have indirect effects on ensuring stable income or influencing investment strategies, its principal role is safeguarding against the financial uncertainties brought on by currency fluctuation.