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Long Currency Hedge

A long currency hedge refers to a strategy aiming to minimise the risk related to cash flows due for settlement at a future date, for instance in one year’s time. The hedger secures the current exchange rate for that payment to protect themselves from potential losses due to exchange rate fluctuations.For example, a French company (which uses the euro as its functional currency) places a large order with its US supplier (who accept payments in US dollars) worth $10 million, to be paid for in a year’s time. By using a long currency hedge to set the exchange rate at the current rate, the company reduces its exposure to the fluctuation of the EUR/USD exchange rate.For instance, if the one-year forward rate is EUR/USD 1.20 and the spot rate in one year’s time is EUR/USD 1.15, the company will have benefited by locking in the exchange rate in advance, saving the equivalent of $500,000 that would otherwise be lost to the FX market. However, if the dollar appreciates against the euro, the company will have made a loss against the exchange rate available when they have to pay for their order.If this loss is sizeable, it could be highly detrimental to the company. To diversify risk, the company could choose to only take a long currency position for a specific percentage of its exposure and mix its hedging methods.