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