The Effectiveness of Hedging in Mitigating Exchange Rate Risk and Enhancing Financial Stability

Abstract

Exchange rate risk is one of the main factors influencing a company’s financial stability and profitability, particularly for entities engaged in international trade. Currency fluctuations can affect cash flows, asset values, and the competitiveness of export-import activities. Hedging strategies serve as a crucial instrument in mitigating this risk by utilizing derivatives such as forwards, futures, options, and swaps to protect asset and liability values from market uncertainty. This study analyzes the relationship between exchange rate risk, financial performance, and the effectiveness of hedging strategies within corporations. Based on recent literature reviews, appropriate hedging implementation has been found to enhance financial stability, strengthen investor confidence, and reduce income volatility. However, its effectiveness largely depends on the quality of risk governance, the degree of foreign exchange exposure, and the firm’s overall financial policy. A comprehensive and adaptive approach to risk management is therefore essential to ensure long-term corporate resilience amid global currency fluctuations.