Abstract
Example:
Imagine you take a vacation in GB and bring € with you, and you convert them as £ as needed.
-What is the risk here?
Appreciation of the £ ( depreciation of €)=> decreased buying power of your €.
-How can you “protect” yourself against it? Convert before you go to GB you € into £.
As soon as we need to do transaction in another currency there is a risk due to the fluctuation of the two currencies.
Exposure to exchange rate risk:
You are exposed to exchange rate risk if the value of you income or wealth or net worth will change if exchange rates change unexpectedly in the future.
(unexpectedly because if you expect it, then you can protect yourself from it)
Hedging is taking an action to reduce your exposure to exchange rate risk.
Speculation is taking an action that increases your exposure to exchange rate risk, usually to try to profit from your belief about what future exchange rates will be.
(basically : hedging = not taking risk = se couvrir/se protéger, speculation = the contrary)
