In the case of a structured financial product, the trading currency here, assuming: EUR, is different from the currency of the underlying (reference base; assumed: USD). However, the risk of an unfavorable exchange rate at contract maturity is eliminated by a hedging transaction. The price of the product is therefore influenced solely by the market value of the reference base, i.e. in USD in the example. – The costs of currency hedging depend essentially on – the price of the underlying in the contract currency, – the interest rate differential between the trading currency (EUR) and the contract currency (USD), and – the volatility (margin of fluctuation) of the underlying and the selected contract currency. – See composite, settlement risk, Herstatt risk, hedging, net interest rate differential, option, exotic, swap rate, certificate.
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