Lock Currency Contract For Free

Use hedging instruments Hedging instruments are contracts or agreements that allow you to lock in a certain exchange rate for a future transaction or period. For example, you can use a forward contract, a futures contract, an option, or a swap to hedge your currency risk.

Not managing currency risk is like speculating on the future of your business while betting that the markets will always move in your favour. Being well protected against currency risk will strategically reduce your exposure to market risks and may even become a competitive advantage.

The most direct method of hedging foreign exchange risk is a forward contract, which enables the exporter to sell a set amount of foreign currency at a pre-agreed exchange rate with a delivery date from 3 days to 1 year into the future.

Despite the perceived dangers of foreign investing, an investor may reduce the risk of loss from fluctuations in exchange rates by hedging with currency futures. Simply stated, hedging involves taking on one risk to offset another. Futures contracts are advance orders to buy or sell an asset, in this case, a currency.

One of the simplest ways to avoid the risks associated with fluctuations in exchange rates is to quote prices and require payment in U.S. dollars. Then both the burden of exchanging currencies and the risk are placed on the buyer.

Currency risk can be reduced by hedging, which offsets currency fluctuations. If a U.S. investor holds stocks in Canada, for example, the realized return is affected by both the change in stock prices and the change in the value of the Canadian dollar against the U.S. dollar.

Currency futures contracts are the same as ordinary futures contracts, but what is exchanged is specifically two currencies. One party will agree to buy a certain amount of another currency at a set price at a specified time in the future.