Which hedging strategy involves a purchase/sale against a future purchase/sale of equal amount?

The correct answer is the concept related to a swap contract, where parties agree to exchange cash flows or assets over a specified duration. In the financial context, a swap can involve the exchange of foreign currencies or interest rates, essentially setting a future transaction that offsets a future exposure. This relationship allows companies to manage their risk associated with fluctuating exchange rates or interest rates by locking in terms in a structured agreement.

In contrast, other hedging strategies implement different methods. A forward market hedge involves entering into a forward contract to buy or sell a currency at a predetermined rate on a future date, which can effectively lock in a price but does not directly involve a counterpart sale or purchase of equal amounts like a swap contract does. A currency option hedge provides the right, but not the obligation, to buy or sell a currency at a specified price before a set date; this introduces flexibility but is distinct from the direct exchange aspect of a swap. The foreign market hedge typically refers to strategies that minimize risk in foreign investments or operations but does not specifically encapsulate the equal buy/sell transaction characteristic central to swap agreements.

Understanding the unique characteristics of these hedging strategies and their applications is essential for navigating international business risks effectively.