How to Hedge Currency Risk

http://www.forexconspiracyreport.com/how-to-hedge-currency-risk/ How to Hedge Currency Risk By www.ForexConspiracyReport.com A reliable way to hedge currency risk is to use Forex options. This approach works for businesses that need to make purchases with foreign currencies, currency speculators who engage in strategies such as the carry trade and anyone who wants to use a safe haven currency to protect their wealth. How to hedge currency risk is by purchasing calls on the currency that you will or may need to buy with the currency that you have. How does this work? Forex and Forex Options There are two kinds of options that one can purchase or sell. These are calls and puts. A call gives the buyer the right to purchase one currency with another at a set price called the strike price. He has a base currency and purchases a call option on the reference currency. The buyer is under no obligation to do so and will only execute the options contract and make the purchase if it is profitable to do so. The seller of a call is, however, obligated to sell the base currency and purchase the reference currency if the buyer executes the options contract. The seller receives a premium for taking on this risk. A put gives the buyer the right to sell one currency for another at a set price called the strike price. He has a base currency and buys a put option that will allow him to sell the base currency and purchase the reference currency if doing so will make a profit or hedge against loss. The seller of a put contract is obligated to purchase the base currency with the reference currency when the buyer executes the contract. The seller receives a premium for taking on this risk. Hedging Risk Getting hurt by the Forex race to the bottom is a distinct possibility for international businesses. As an example, Japan has been seeking to devalue its currency to make its exports more competitive and to jumpstart its sluggish economy. Let’s say that you are a Japanese airline and you want to purchase the new Boeing 787 Dreamliner. Depending on specifics this airplane sells for $225 million to $306 million. You sign the contract and obligate yourself for payment of $306 million in US dollars. However, the money that you have in the bank is in Yen. You will need to make payment when you receive the jet in a year. If Japan wins the Forex race to the bottom it will make the airplane more expense in Yen. How to hedge currency risk in this instance is to purchase a set of call options on the US dollar with Yen. The airline pays a premium, insurance, in order to lock in the top price that the company will need to pay in Yen when the plane is delivered. We say top price because it is always possible that the US dollar will fall in value versus the Yen. In that case the company lets the call options expire and pays in now more valuable Yen, saving money. Seeking a Safe Haven Many people seeking a safe haven for their money in times of trouble simply purchase Yen, Swiss francs, Euros or US dollars and then use the money to purchase government bonds. An alternative at least for the short term is to use calls or puts to hedge currency risk. For speculators, trading currencies for profit, the same approach works to protect against risk of a bad trade while waiting for the market to produce a profitable trade. https://youtu.be/_qJTxzaT4is

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