There is natural hedging and financial instrument hedging
Hedging is essentially the process of minimising the risk of currency fluctuations
In regards to derivatives, derivatives are used by businesses to hedge as derivatives by definition are tools that help minimise the risk of exchange rate fluctuations. There are 3 types within the textbook ( Business Studies in Action ), forward contracts, options and swap contracts.
A forward option is when you agree to purchase a currency at a future time at a predetermined price
Options contract is when you have the right but not obligation to purchase to buy or sell foreign currency e.g Qantas in 2013 had hedged its oil needs through the form of options, and since oil is volatile in price ( fluctuates ), they can take advantage if the price is lower than their option contract
A swap contract is used in the spot market is basically a currency swap, so one business will buy their own currency and another business will buy their own currency and then swap it
Hope i helped
What is the difference between hedging and derivatives? I have everything in the syllabus under control except this confusing thing.. Pls detailed and examples of each