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Hedging foreign exchange risk

Introduction – terminology

1.1 Exchange rate quotes

Foreign exchange hedging questions will always contain exchange rate
quotes. It is vital that you can interpret the given quotes correctly.

An exchange rate quote is simply the ratio of how much of one currency
is equivalent to one unit of another.

Example 1

For example, EUR (€) 1.2000 = GBP (£) 1

shows how many € (the counter currency) are equivalent to £1 (£ is the base
currency).

Note that this could alternatively be written as £0.8333 = €1, where the base
currency is now the €.

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