A second critical tool in risk management is hedging, which is greatly facilitated by the global banking system. In the commercial world, if one wishes to buy a fermentation plant from a Swiss supplier with 10 percent down and 90 percent due on delivery 12 months hence, one considers a currency hedge. If the price is quoted in U.S. dollars, the Swiss manufacturer may buy a forward option on dollars. If it is quoted in Swiss francs, the U.S. customer may buy a forward option on Swiss francs. In either case, for a small price, their business plans are not exposed to currency risk. When I joined W. R. Grace & Co. in 1982, I found just such a contract on a fermentation pilot plant in place. In fact, the dollar strengthened dramatically, so we bought the plant far more cheaply than expected, while being fully protected if the currency had moved in the opposite direction.
The bankers offering these hedges can reduce their risks substantially, for example, by finding a counterparty, perhaps a Swiss firm buying computers from a U.S. supplier in the same time frame. This activity is classic hedging. Note that the hedge is against market risk.