Derivatives Market-Types of Traders. Hedgers Speculators Arbitrageurs. Hedgers. Hedgers use derivatives to reduce the risk that they face from potential future movements in a market variable or underlying asset. Table. Hedging Using forward Contracts.
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Suppose that it is July 20, 2007, and lmportCo, a company based in the United States, knows that it will have to pay £10 million on October 20, 2007, for goods it has purchased from a British supplier. The USD-GBP exchange rate quotes made by a financial institution are shown in Table 1.1. ImportCo could hedge its foreign exchange
risk by buying pounds (GBP) from the financial institution in the 3-month forward
market at 2.0531. This would have the effect of fixing the price to be paid to the British
exporter at $20,531,000.