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Sir I understood that forward can be used as a way of hedging foreign exchange risk. but will it hedge 100% of the risk like that of when we use inovice in home currency. won’t there be a bit loss at our end. ?
I explain forward rates (and the other ways of hedging) in my free lectures.
There is no gain or loss – it is simply fixing the exchange rate to be used on a future date (which might be better or worse than the spot rate on that date).
Sir I have seen the lecture suppose today’s spot rate is Rs/$ 100 we are importing $1000 worth of Goods the risk is our currency value might decrease so we are having to end up paying more. sir the forward rate quoted would be more than the spot rate. say Rs/$102 in this rate I would still pay more than if I had exchanged today. So my question is the risk that the our currency will decrease in value more than the forward rate and we will loose way more?
Using a forward rate may mean you end up paying more or less than if you were just leaving it and converting at spot.
However this is not a reason for using forward rates. If you do nothing (and so convert at spot) there is risk because you have no idea what spot will be on the date of the transaction.
Using a forward rate removes the risk because the conversion will be at the forward rate whatever happens to the spot rate. (And having agreed a forward rate you then have to convert at that rate.)
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