Business & Investments

Offshore Currency Risk

(PRWEB) July 7, 2005

International commerce has rapidly elevated as the web has provided a new and far more transparent marketplace for individuals and entities alike to conduct international business and trading activities. Significant adjustments in the international economic and political landscape have led to uncertainty concerning the direction of foreign exchange rates. This uncertainty leads to volatility and the require for an powerful automobile to hedge foreign exchange rate risk and/or interest rate adjustments while, at the exact same time, effectively ensuring a future monetary position.

Each and every entity and/or individual that has exposure to foreign exchange rate risk will have specific foreign exchange hedging needs and this internet site can not possibly cover each and every existing foreign exchange hedging circumstance. As a result, we will cover the much 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 frequent to virtually all who conduct international business and/or trading. Buying and/or selling of goods or services denominated in foreign currencies can instantly 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 proper at the time the quote is given, the foreign exchange rate quote may not necessarily be proper 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” expense 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 possibly sell when the carry price he or she can collect is at a premium to the actual carry expense of the contract sold. Conversely, an arbitrager might acquire when the carry expense he or she might pay is much less than the actual carry price of the contract purchased. Either way, the arbitrager is seeking to profit from a tiny 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 bigger 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 certain 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. Very first, the stock cost might go either up or down and the investor is exposed to the speculative stock cost risk. Second, the investor is exposed to foreign exchange rate risk due to the fact the foreign exchange rate might either appreciate or depreciate from the time the investor first bought 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). For that reason, even if a speculative profit is achieved simply because the foreign stock price rose, the investor could truly net lose cash if devaluation of the foreign currency occurred although the investor was holding the foreign stock (and the devaluation quantity 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 shield 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 through a number of foreign exchange hedging vehicles that can be used either alone or in mixture to generate entirely new foreign exchange hedging strategies.

John Nobile – Senior Account Executive

CFOS/FX – Online Forex Spot and Options Brokerage

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