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Yes Muhammad Ahmed Siddiqui , Forward currency exchange rates and hedging are interrelated.
Hedging is a technique which is used to offset the loss which is estimated on the basis of forward exchange rates. For example if we are dealing with international company, and we have to pay our invoice in the currency which is not local.
Then we will estimate the forward rates, if we have to pay in3 months and the currency value is considered to be changed devalued or appreciated then we will use hedging.. Now how to use hedging.. this depends on the situation and available sources. One way is to have a loan of local currecy now at eg5% .. change it to foreigh currency now and deposit it into foreign currency bank account for3 months giving7% return.. then on maturity of payment pay the foreing company through this foreign account... and pay the local loan with local currency..
This way the difference of rate of borrowing and deposit will offset some of the loss..
Hedging is the tool used to eliminate the risk of currency exchange rate.
