The Basics of Currency Hedging

July 18
10:45 AM 2013

Currency hedging is both an art and a science. It is an approach that has the purpose of managing the degree of risk that can present itself when engaged in a strategy using foreign investment.  The currency's hedging structure would provide a buffer to compensate for fluctuations in the relative value of the currency type used in the investment. WIth this buffer, it minimizes the exposure of the investor for the sudden shifts in the market to be able to obtain a reasonable return on the investment even if the currency declines or devalues during a given period.

Generally speaking, hedging strategies are understood to help prevent the consequences in the occurrence of ervents that can result in a loss in the financial repercussions of a given transaction. The trick is to convert or exchange the currency when the exchange rate is most favorable and to make the investment in the currency that is native to that country where the investment would be based. An example would be instead of purchasing shares of stock in a company based in Japan using US dollars, one first converts the dollars to yen and then the yen would be used to purchase the shares of stock.

One of the most cost-effective hedging strategies is buying a foreign currency options. Foreign currency options give the purchaser the option to sell or buy a foreign currency contract at a specific price on a specific date. There are only a number of firms that offer currency options to SMEs. One of such firms is FXWELLS, which offers a flexible expiration date and low fees.

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