.

Currency exchange rates: A necessity

Currency exchange rates: A necessity

In the language of finance between two currencies of different countries, the rate at which it will be exchanged for the other is called as “currency exchange rates”. These rates can be easily calculated with an exchange rates calculator. Basically, an exchange rate tells you the value of a currency in terms of another currency. With an exchange rate calculator you can easily tell how much units of a currency is equal to one unit in another currency. This will tell you which of the currencies is stronger that is, which of the two economies is stronger. The pound has the highest currency exchange rate against any other currency. 

There are a lot of situations in which people may need to exchange currencies from one another, like, if a person is getting paid in a foreign currency, buying something from another country, or simply ordering something on the internet, etc.

In these situations the person can easily take help from the exchange rate calculator available on the internet. If a person is planning to travel to a foreign country, he will need money to spend there. So, he can go to a local money changer and get the foreign currency of his desire with the help of an exchange rate calculator. The person may also buy traveler’s check or maybe a traveler’s card but most of the people going abroad take with them some foreign currency so that they don’t face any problems. The current exchange rate for any of the currencies can be found out online with the help of Exchange Rate Calculators. All you need to do is enter a desired amount to be converted and indicate the currency of your choice. It is as simple as that!

In the retail exchange markets, money dealers will quote a different buying and selling rate. The buying rate is at which the currency will be bought and the selling rate is at which the currency will be sold. The quoted rates are such that will incorporate a dealer’s margin, his profit, in the exchange rate or else the profit may be recovered in the form of a commission in some other way.

Archived under Exchange Rates Comments

Protect Your Currency Trading by Forex Hedging Methods

Protect Your Currency Trading by Forex Hedging Methods

Whenever anyone is investing in forex trading, it is important that he or she brings in a factor of safety to his investments. Forex market is such that it will fluctuate with such rapidity that it will become extremely difficult to bring forth a surer way of making profits. Although everyone in forex market is in the hope of making forex profits, yet the truth is not always on the beneficial side. For professionals, novices and even amateur part timers, there is a risk associated. But, thankfully there is a concept of hedging associated with forex market where it helps in continuous risk lessening or management.

For those who have been in the forex trading, they will agree that trading in forex is not without risk. So, it is better to have forex hedging as a tool to safeguard against many of the risk factors.

This is a method by which the investors and traders are able to minimise or transfer their risk. Hedging is an important tool for traders in forex in managing risk quite effectively. Forex hedging can be of different methods and types. There are many options to choose from but some of the common forms of hedging are:

Future contracts – The future type of trading is done by the trader wherein they get into an agreement where they agree to exchange a currency for another currency at a particular and fixed date in the future at the existing price when the last closing is done. By this method, the loss might not be much because people will be hedging their losses as the prices might not have gone down heavily. Future contract is a very useful tool for forex hedging that are used by most of the traders.

Spot contracts – One of the most basic methods of hedging in forex trading used by retail forex traders. By this kind of contracts, the delivery has to be done in two days only. And this is the only disadvantage that is considered in the hedging process as it might not be entirely a safeguard method.

Foreign currency options – In the forex trading options this is one of the most famous forex hedging method among all the types of traders. In such an option, the trader can buy or sell the currency pair as and when needed without any obligation to buy or sell on any specific date or time or any specific rate.

As soon as you have selected your strategy, you can subsequently employ it onto your trade. Take into account that you should keep track of the market developments since you would have to alter your decisions consequently. Nevertheless, there is not a solitary size that suits all strategies and therefore, you should keep altering in line with the market alterations. It is advisable that you remain alert all the time.

Forex hedging has been considered as one of the most common parts of forex trading and this has been easily accepted by a lot of forex traders without which, losses would always have been more than the profits.

Archived under Currency Hedging Comments

Foreign Exchange Hedging Policy – Types of Foreign Currency Hedging Vehicles

Foreign Exchange Hedging Policy – Types of Foreign Currency Hedging Vehicles

Foreign Exchange Hedging Policy

The following are some of the most common types of foreign currency hedging vehicles used in today’s markets as a foreign currency hedge. While retail forex traders typically use foreign currency options as a hedging vehicle. Banks and commercials are more likely to use options, swaps, swaptions and other more complex derivatives to meet their specific hedging needs. Foreign Exchange Hedging Policy

Spot Contracts – A foreign currency contract to buy or sell at the current foreign currency rate, requiring settlement within two days.

As a foreign currency hedging vehicle, due to the short-term settlement date, spot contracts are not appropriate for many foreign currency hedging and trading strategies.

Foreign currency spot contracts are more commonly used in combination with other types of foreign currency hedging vehicles when implementing a foreign currency hedging strategy.

For retail investors, in particular, the spot contract and its associated risk are often the underlying reason that a foreign currency hedge must be placed. The spot contract is more often a part of the reason to hedge foreign currency risk exposure rather than the foreign currency hedging solution.

Forward Contracts – A foreign currency contract to buy or sell a foreign currency at a fixed rate for delivery on a specified future date or period.

Foreign currency forward contracts are used as a foreign currency hedge when an investor has an obligation to either make or take a foreign currency payment at some point in the future. If the date of the foreign currency payment and the last trading date of the foreign currency forwards contract are matched up, the investor has in effect “locked in” the exchange rate payment amount.

* Important: Please note that forwards contracts are different than futures contracts. Foreign currency futures contracts have standard contract sizes, time periods, settlement procedures and are traded on regulated exchanges throughout the world. Foreign currency forwards contracts may have different contract sizes, time periods and settlement procedures than futures contracts. Foreign currency forwards contracts are considered over-the-counter (OTC) due to the fact that there is no centralized trading location and transactions are conducted directly between parties via telephone and online trading platforms at thousands of locations worldwide. Foreign Exchange Hedging Policy

Foreign Currency Options – A financial foreign currency contract giving the buyer the right, but not the obligation, to purchase or sell a specific foreign currency contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign currency option buyer pays to the foreign currency option seller for the foreign currency option contract rights is called the option “premium.”

A foreign currency option can be used as a foreign currency hedge for an open position in the foreign currency spot market. Foreign currency options can also be used in combination with other foreign currency spot and options contracts to create more complex foreign currency hedging strategies. There are many different foreign currency option strategies available to both commercial and retail investors.

Interest Rate Options – A financial interest rate contract giving the buyer the right, but not the obligation, to purchase or sell a specific interest rate contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the interest rate option buyer pays to the interest rate option seller for the foreign currency option contract rights is called the option “premium.” Interest rate option contracts are more often used by interest rate speculators, commercials and banks rather than by retail forex traders as a foreign currency hedging vehicle.

Foreign Currency Swaps – A financial foreign currency contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the spot rate. The buyer and seller exchange fixed or floating rate interest payments in their respective swapped currencies over the term of the contract. At maturity, the principal amount is effectively re-swapped at a predetermined exchange rate so that the parties end up with their original currencies. Foreign currency swaps are more often used by commercials as a foreign currency hedging vehicle rather than by retail forex traders.

Interest Rate Swaps – A financial interest rate contracts whereby the buyer and seller swap interest rate exposure over the term of the contract. The most common swap contract is the fixed-to-float swap whereby the swap buyer receives a floating rate from the swap seller, and the swap seller receives a fixed rate from the swap buyer. Other types of swap include fixed-to-fixed and float-to-float. Interest rate swaps are more often utilized by commercials to re-allocate interest rate risk exposure. Foreign Exchange Hedging Policy

Archived under Currency Hedging Comments

Chatham Financial: Foreign Currency Hedging


Chatham is the world’s largest independent provider of foreign currency risk advisory services. After assessing a client’s risks, objectives and constraints, we help identify the various tools that address the risks — whether foreign currency forward contracts, options, collars, cross currency swaps or a wide range of other risk management solutions.

Archived under Currency Hedging Comments

Why Companies Use Derivatives for Hedging Currency Risks

Why Companies Use Derivatives for Hedging Currency Risks

After the collapse of Bretton Woods system in the early 1970s, the exchange rates of major currencies became floating, thus leaving the supply and demand to adjust foreign exchange rates in accordance to their perceived values. The increase in volatility of the exchange rates, together with the increase in the volume of world trade led to the escalation of foreign-exchange risk.

Currency risk is part of the operational and financial risk associated with the risks of adverse movements in the exchange rate of one particular currency against another. In comparison with investments in local assets, the freely fluctuating currency rates represent an additional risk factor for investors who want to diversify their portfolios internationally.  Therefore, the control and management of the currency exchange rate risk is an integral part of business management with a view to improve the effectiveness of international investments.

One effective and generally accepted method for this type of risk management is the use of derivative financial instruments (derivatives) such as futures, forwards, options and swaps.

Although derivatives are extremely diverse, by their legal nature all of them constitute a contract between the buyer and seller, concluded in present, while the performance will take place at some time in the future. The value of the derivative contract depends on the price movement of the base or “underlying” security.

1. Using Derivatives for Elimination of Uncertainty (Hedging)

Derivative financial instruments are widely used tools for management and protection against various types of risk and are an integral part of numerous innovative investment strategies.  They make future risks negotiable, which leads to the removal of uncertainty through the exchange of market risks, known as hedging. Corporations and financial institutions, for example, are using derivatives to protect themselves against changes in the prices of raw materials, forex exchange rates, stocks, interest rates, etc. They serve as insurance against adverse movements in prices and as a reduction of price fluctuations, which in turn leads to more reliable forecasts, lower capital requirements and higher capital efficiency. These advantages are led to the extensive use of derivative financial instruments: according to ISDA over 94% of the largest companies in USA and Europe manage their risk exposures, through the usage of derivatives.

In summary – an investor that has decided to hedge the risk will become a party to a derivative contract, which leads to the financial result, the exact opposite of the financial result generated by the risk. That is, when the value of the hedged asset falls, then the value of the derivative security must increase and vice versa.

2. Using Derivatives for Providing Protection with Minimal Initial Investment

In addition, derivatives provide protection against currency risks with minimal initial investment and consumption of capital at the exceptionally high adaptability of the contractual terms and conditions in relation to the specific needs of each contracting party. They also enable investors to trade future price expectations buying or selling derivative asset instead of the base security at a very low cost in comparison with the direct investment in the underlying asset. The total value of the transaction for the purchase of a derivative on the major currencies is about 80 per cent lower than that of the purchase of a portfolio of relevant basic currencies. If compared with the costs of exposure in less liquid assets such as real estate, the difference in costs between derivative and direct investment in the underlying asset is even significantly higher.

3. Using Derivatives as an Investment

Another way to use derivatives is as an investment. Derivatives are an alternative to investing directly in assets without purchasing the base security. They also allow investments in securities, which cannot be purchased directly. Examples include credit derivatives, which provide payment if the creditor cannot fulfill its bond obligations.

4. Using Derivatives for Speculative Purposes

Although most participants in the market are using derivatives to hedge risks, some of them frequently trade derivatives for the purpose of generating profit at favorable price movements and without any offset positions. Usually, investors open positions in derivative contracts to sell an asset, which in their opinion is overestimated in predetermined period or date in the future. This trading strategy is profitable if the value of underlying assets actually falls. Such trading strategies are extremely important for the efficient functioning of financial markets, thus reducing the risk of a significant understatement or overstatement of the underlying assets.

The use of derivatives for risk management is nowadays widespread in developed economies and is considered to be a routine part of the business of financial institutions and companies. The derivative financial instruments serve mainly as insurance against adverse movements in prices and as a tool for reducing  price fluctuations, which in turn leads to more reliable forecasts, lower capital requirements and higher productivity. 

Furthermore the derivatives provide protection against currency exchange risk with minimal initial investment and consumption of capital at exceptionally high adaptability of the contractual terms and conditions meeting the requirements and needs of investors. They also enable market participants to trade future price expectations, this way purchasing a derivative financial asset instead of the base security at a very low cost in comparison with the total transaction if investing directly in the underlying asset.

 

Archived under Currency Hedging Comments

« Previous entriesNext Page »Next Page »