A hedge that involves the use of foreign exchange forwards (FX forwards). It consists of an outright purchase of a currency at a forward exchange rate. The hedge is affected by interest rates in the two countries whose currencies are involved and the spot exchange rate between the two currencies
This leads to offsetting an expected receivable / payable denominated in foreign currency by entering into a forward contract, at the outset, to sell/ buy the currency at some future date that corresponds to the expected receipt/ payment date of the foreign currency.
