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