International commerce has rapidly increased as the internet
has provided a new and more transparent marketplace for
individuals and entities alike to conduct international business
and trading activities. Significant changes in the international
economic and political landscape have led to uncertainty
regarding the direction of foreign exchange rates. This
uncertainty leads to volatility and the need for an effective
vehicle to hedge foreign exchange rate risk and/or interest rate
changes while, at the same time, effectively ensuring a future
financial position.
Each entity and/or individual that has exposure to foreign
exchange rate risk will have specific foreign exchange hedging
needs and this website can not possibly cover every existing
foreign exchange hedging situation. Therefore, we will cover the
more common reasons that a foreign exchange hedge is placed and
show you how to properly hedge foreign exchange rate risk.
Foreign Exchange Rate Risk Exposure - Foreign exchange rate
risk exposure is common to virtually all who conduct
international business and/or trading. Buying and/or selling of
goods or services denominated in foreign currencies can
immediately expose you to foreign exchange rate risk. If a firm
price is quoted ahead of time for a contract using a foreign
exchange rate that is deemed appropriate at the time the quote is
given, the foreign exchange rate quote may not necessarily be
appropriate at the time of the actual agreement or performance of
the contract. Placing a foreign exchange hedge can help to manage
this foreign exchange rate risk.
Interest Rate Risk Exposure - Interest rate exposure refers to
the interest rate differential between the two countries'
currencies in a foreign exchange contract. The interest rate
differential is also roughly equal to the "carry" cost paid to
hedge a forward or futures contract. As a side note, arbitragers
are investors that take advantage when interest rate
differentials between the foreign exchange spot rate and either
the forward or futures contract are either to high or too low. In
simplest terms, an arbitrager may sell when the carry cost he or
she can collect is at a premium to the actual carry cost of the
contract sold. Conversely, an arbitrager may buy when the carry
cost he or she may pay is less than the actual carry cost of the
contract bought. Either way, the arbitrager is looking to profit
from a small price discrepancy due to interest rate
differentials.
Foreign Investment / Stock Exposure - Foreign investing is
considered by many investors as a way to either diversify an
investment portfolio or seek a larger return on investment(s) in
an economy believed to be growing at a faster pace than
investment(s) in the respective domestic economy. Investing in
foreign stocks automatically exposes the investor to foreign
exchange rate risk and speculative risk. For example, an investor
buys a particular amount of foreign currency (in exchange for
domestic currency) in order to purchase shares of a foreign
stock. The investor is now automatically exposed to two separate
risks. First, the stock price may go either up or down and the
investor is exposed to the speculative stock price risk. Second,
the investor is exposed to foreign exchange rate risk because the
foreign exchange rate may either appreciate or depreciate from
the time the investor first purchased the foreign stock and the
time the investor decides to exit the position and repatriates
the currency (exchanges the foreign currency back to domestic
currency). Therefore, even if a speculative profit is achieved
because the foreign stock price rose, the investor could actually
net lose money if devaluation of the foreign currency occurred
while the investor was holding the foreign stock (and the
devaluation amount was greater than the speculative profit).
Placing a foreign exchange hedge can help to manage this foreign
exchange rate risk.
Hedging Speculative Positions - Foreign currency traders
utilize foreign exchange hedging to protect open positions
against adverse moves in foreign exchange rates, and placing a
foreign exchange hedge can help to manage foreign exchange rate
risk. Speculative positions can be hedged via a number of foreign
exchange hedging vehicles that can be used either alone or in
combination to create entirely new foreign exchange hedging
strategies.
Sri Lanka Rupee, Stocks Drop After Currency Trading Band Removed Bloomberg The central bank narrowed the currency's trading band against the dollar on Feb. 3 and Feb. 6 and today, prior to announcing its removal. The monetary authority raised benchmark interest rates for the first time since 2007 on Feb.
India Eases Currency Trading Limits for Some Banks Wall Street Journal By SUDEEP JAIN MUMBAI -- India's central bank has asked banks to approach it individually for relaxing some foreign currency trading limits and has already eased restrictions for some banks, a top official said Monday. "Some limits, based on their ...
iFOREX Adds Oil to its list of Tradable Commodities MarketWatch (press release) ROAD TOWN, Tortola, Feb 09, 2012 (BUSINESS WIRE) -- Leading currency trading company, iFOREX, has recently expanded its services, giving all Forex trading accounts direct access to oil CFDs. Targeting an audience that has little or no experience with ...
This January Azerbaijan's exchange currency trading totaled $82.5 million Azerbaijan Business Center Baku, Fineko/abc.az. The Baku Interbank Stock Exchange (BBVB) has renewed statistics of its operations. BBVB reports that in January 2012 the nine participating banks concluded 28 deals in 36 trading sessions in e-trading system (BEST).
FOCUS: Technology Buoys Retail Currency Trading, Reshapes Old Models Wall Street Journal By Eva Szalay Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Retail foreign-exchange trading is emerging as one of the biggest growth areas in the currencies space, and some of the trading firms that facilitate these flows are building up a whole new ...
Morgan Stanley Currency-Trading Head Stephen Mettler Leaves Bank BusinessWeek By Michael J. Moore Jan. 26 (Bloomberg) -- Stephen Mettler, who oversaw Morgan Stanley's interest rates and foreign-exchange trading businesses, has left the bank. Mettler, who joined the firm in 1997, retired, according to an internal memo obtained by ...
Bank of England and ECB Hold Steady, Indonesia Cuts CNBC.com [CNBC] ----------------------- MULTI CURRENCIES VS THE DOLLAR Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm. Learn more: The essential vocabulary for currency trading is on Key Currency ...
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