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Currency forward contracts are used to hedge against foreign exchange rate risk. Exchange rates are represented by the ratio of domestic currency to foreign currency. For example, if 1 US dollar is equivalent to 1.3 Australian dollars, the exchange rate is written as AUD 1.3/USD. In a currency forward contract, one party is long (buying) and the other is short (selling) a specific amount of currency at a predetermined rate for a future date.
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