Debt hedging is the practice of using financial instruments to protect against the risk of changes in
interest rates or foreign exchange rates. This can be done by entering into forward contracts, futures contracts, swaps, or options.
For example, a company that has
borrowed money in US dollars but generates revenue in Australian dollars could use a forward contract to lock in an exchange rate for a future date. This would protect the company from the risk of the Australian dollar depreciating against the US dollar, which would increase the cost of repaying the loan.
Debt hedging can be a useful tool for businesses to manage their financial risk. However, it is important to note that hedging can also increase costs. Businesses should carefully consider the potential benefits and costs of hedging before entering into any financial contracts.