Explain the concept of currency hedging.

Currency hedging is a risk management strategy used by individuals, businesses, and investors to protect themselves against potential losses due to fluctuations in exchange rates. It involves taking measures to offset or minimize the impact of currency exchange rate movements on financial transactions or investments.

Currency hedging can be achieved through various methods, such as using forward contracts, options, futures, or swaps. These financial instruments allow individuals or businesses to lock in a specific exchange rate for a future date, thereby reducing the uncertainty and potential losses associated with currency fluctuations.

By hedging their currency exposure, individuals and businesses can mitigate the risks of adverse exchange rate movements. This is particularly important for those involved in international trade or investment, as exchange rate fluctuations can significantly impact the profitability and competitiveness of their transactions.

Overall, currency hedging is a proactive approach to managing currency risk, providing individuals and businesses with greater stability and predictability in their financial operations.