It is not possible to hedge forex risk fully.
This is so because as long as there exists currency as a medium of exchange the person holding the currency is exposed to different types of risks e.g. political, financial, …
This can be explained with the help of example of an Indian exporter. If he has contracted for exports worth 1000 USD and the spot rate was 45 Rs./$ for a period of 6months with a co. in USA. He would receive his payments 6 months from now, the commercial risk involved here is with respect to the fluctuations in exchange rates. If the rates 6 months from now become 50 Rs/$ then he would receive 50000 USD i.e. he incurs a profit of 5000 USD and vice a versa when the value of Rs. appreciate.
In above case, if we hedge our position the cash flow would be certain, but still we have Rs. i.e. a currency in our hand with which risk prevails.
Here comes in the political risk i.e. even when the Indian exporter has the home currency. In case the country’s economy crashes the currency will loose all it value throughout the world.
Thus, with the help of above e.g. it can be proved that as long as currency is involved we have risk.
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