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company through a U.S. exchange using U. what is the purpose of a derivative in finance.S. dollars (USD). Now the financier is exposed to exchange-rate threat while holding that stock. Exchange-rate risk the hazard that the worth of the euro will increase in relation to the USD. If the value of the euro rises, any revenues the investor realizes upon selling the stock end up being less valuable when they are transformed into euros.
Derivatives that might be utilized to hedge this sort of danger consist of currency futures and currency swaps. A speculator who anticipates the euro to appreciate compared to the dollar might profit by utilizing a derivative that rises in value with the euro. When utilizing derivatives to hypothesize on the cost motion of an underlying asset, the financier does not require to have a holding or portfolio presence in the underlying possession.
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