In international trade, a currency peg usually means a decision by a country to tie the value of its currency to that of a major country such as the U.S. dollar (a single currency peg) or to a basket of currencies (a composite currency peg). In contracts, it is a clause that sets a fixed exchange rate. Currency pegs, though rare, are most often used where contracts are priced in a currency different from the currency in which one of the parties to an agreement conducts most, or a substantial part of its business.
Currency pegs are especially useful where one party in fulfilling its obligations may be incurring substantial liabilities in a currency other than the currency of the contract, but in long-term agreements they can cause substantial risks. A rolling currency peg may also be used, where the exchange rate is determined periodically (or the average over a period is taken) and fixed until the next measurement—such provisions are useful for planning purposes but may still be risky when exchange rates are very volatile. Currency pegs can also be written as a bracket limiting the range by which a currency pair can vary for payment purposes, or as a floor limiting the amount by which a currency can devalue.
A currency peg may also simply provide for some sort of price adjustment or renegotiation if the exchange rate exists a set range. Hedging is in principle an alternative to pegging, but where exchange rates are volatile, it can prove expensive and long range hedging contracts may be difficult to find.