Some of us are exposed to foreign exchange risk. Find out how you can minimize it without even leaving your house.
This article is designed to explain how to start hedging Forex trades easily, right now. Do you need to read it? Unless you are paying in a currency different from your home currency or generate income from other countries – skip it.
So, as you are expecting to receive or pay a certain amount of euros, how can you be sure about a USD amount of the transaction? Well, you actually cannot. Currency market is the largest and the most volatile market, so it is always possible to experience price fluctuations. This is of course increases the uncertainty and to avoid it people are looking into hedging.
Hedging assures that your cash inflows or outflows in your home currency will not change due to the move of the other currency. Imagine you are about to receive 100,000 EUR from your European client for the goods you suppose to produce and ship. While you are based in US and you expect to get 130,000 USD as the EUR/USD rate is 1.3. By the time you produced and shipped the goods, the client transfers you the agreed amount. But snap! Since the time has passed, EUR dropped in value, and now you are just getting 115,000 USD, as the current EUR/USD rate is 1.15.
To hedge your risk, you would need to sell 100,000 EUR by the time the contract is made with your client. This way you would get 130,000 USD straight away and you would owe 100,000 EUR. When you are getting paid by the client, you are also returning these 100,000 EUR and here you go, no risk. Hedging of course comes with a price, you would generally need to pay the spread, which is the difference between bid and ask rates. You may also end up paying or receiving payments for the overnight possession of the transaction.
Hedging can be easily performed with one of the Forex brokers. You can open an account with a regulated broker in your country within just a few minutes. Then you would need to make a deposit of the needed amount of hedging. After this is completed, you can open a trading platform and sell or buy (depending on the currencies) a proper pair. Pay extra attention to the swaps, as this way you may be earning extra funds or losing a bit.
It is always recommended to avoid risks and uncertainty. Being exposed to different currency risk is never good for business and even personal finance. This is why you should consider hedging when doing business with foreign companies, contracting foreign freelancers or just planning to travel.
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