Currency Hedging

In the maritime context, currency hedging refers to a strategy used by global shipping companies to protect against potential losses that could be incurred due to currency fluctuations. As international shipping involves transactions in multiple currencies, companies are exposed to foreign exchange risk. This risk arises from the potential change in the exchange rate between the time an invoice is issued and when the payment is made. To mitigate this risk, companies use currency hedging techniques such as forward contracts, futures contracts, options, or swaps. A forward contract allows the company to lock in an exchange rate for a future date, thus eliminating the uncertainty of fluctuating rates. Futures contracts are similar to forward contracts but are standardized and traded on an exchange. Options give the right, but not the obligation, to exchange currency at a predetermined rate, while swaps involve the exchange of one currency for another at a specified rate and then the reversal of the exchange at a later date.