Why Hedge Foreign Currency Risk?
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
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
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
John Nobile - Senior Account Executive
CFOS/FX - Online
Forex Spot and Options Brokerage
MORE RESOURCES updated Mon. December / 18 / 2017
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The Secrets of the
The first and perhaps most important "secret" is to realize
that your methodology or approach (no matter how good) is
only part of being a highly successful trader. This applies
to any trading style including, day trading, swing trading
or position trading.
Forex Trading -
Advantages and Disadvantages
What is Forex Trading? Forex, or Foreign Exchange, is the
simultaneous exchange of one country's currency for that of
another. This market of exchange has more daily volume,
both buyers and sellers, than any other in the world.
FOREX 101: Make Money
with Currency Trading
For those unfamiliar with the term, FOREX (FOReign EXchange
market), refers to an international exchange market where
currencies are bought and sold. The Foreign Exchange Market
that we see today began in the 1970's, when free exchange
rates and floating currencies were introduced.
Money Management, Part
There are some common mistakes I've seen traders make in
the area of money management. First, let's understand what
money management is all about.
Intrenet Marketing VS
Forex Currency Trading
Have you noticed that when someone's trying to sell you
something - such as a system for making money - they always
make it look far easier than it is? Let's look at two
Internet businesses, almost as diametrically opposed as
it's possible to be - Internet Marketing and Forex Currency
Trading. You've probably heard the old Internet adage -
build a better website and they will come.
Why Hedge Foreign
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.
Two Timeless Rules in
RULE #1) ~ Cut your losers; let your winners ride. One
important thing that every new trader must know before
entering this highly profitable business is that life is
not perfect, even in FOREX land, and you should always know
one fact: YOU WILL HAVE LOSING TRADES.
The Secret of Reduced
One of the best kept secrets in trading is that of reduced
margin spreads. You cannot name a trading method that
provides more safety or a greater return on margin than
does a reduced margin spread, while also being one of the
least time- consuming ways to trade.
Day Trading - Moving
Averages vs Support and Resistance
When day trading the SP and Nasdaq futures, do you rely on
your moving averages more than your support & resistant
areas?During the first hour of trading, the support and
resistance zones on the SP and Nasdaq futures are the most
important things to watch. The moving averages have not yet
had a chance to come into play.
The Nature of the
Consider the following: As a trader you are in a business.
Your strongest opponent has plenty of capital.
Adaptation to the
Realities of the Market
Do you think adaptation to the realities of the market is
the most important thing?Many times in the past I've
written about the need to adapt, the need to be able to
change your behavior relative to the market because the
markets are ever changing. I've stated that mechanical
systems may be workable, but for only a short time relative
to the life of markets.
Opportunities Presented by the New Iraqi
Could it be possible that you are staring right into the
most spectacular financial opportunity of the century?
Operation: Iraqi Freedom will undoubtedly be a war marked
in history for loss and tragedy, American victory, and the
rise of a nation with a new democratic government. But
could it also be a war historically remembered for the
financial opportunity it created for the sharp investors
who keenly recognized an ephemeral chance at the right
time?The War on Iraq ended with a nation placed on the
footstool of many new operations.
Stocks Trading -
Advantages and Disadvantages
What is Stocks Trading? Companies throughout the world issue
new stock shares every day. They do so to raise capital in
order to invest in the business.
What I Learnt Losing
£60,000 My First Year as a Full-time
During my first year as a local (independent trader) on the
floor of LIFFE, I bought and sold 8804 FTSE futures
contracts, about 40 contracts per day on average. The
result was a loss of £61,620 or -£267 per trading
Risk and Stock Trading
Fees: The Two Barriers To Overcome If You Want A Successful
You know the old joke:" How do you make a million in the
stock market? Start with two million?" There is no way
around it, risk and stock market fees are a part of trading
that you can't avoid. But, you can manage your risk.
Forex Trading Online - 7
Reasons Why You Should!
Forex trading online is a fast way to use your investment
capital to it's fullest. The Forex markets offer distinct
advantages to the small and large traders alike, making
Forex currency trading in many ways preferable to other
markets such as stocks, options or traditional futures.
A Short Introduction To
FOREX is the world's largest and most liquid trading
market. Many consider FOREX as the best home business you
can ever venture in.
The Basics of
Foreign exchange market is also known as Forex or FX
market. To date, it is the world's biggest "economic
Ways to Acquire
Discipline in Trading
One way to acquire discipline in trading..
Where is the Market
If you ask me whether the market will have moved up or down
by this time next year, well I may as well flip a coin,
because I don't know. If you ask me whether the market will
have moved up or down by this time next month, well again,
I may as well flip a coin, because I still don't know.
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