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Foreign Currency Hedging for the Importer or Exporter
Submitted By: SB Wise Date: July 22, 2010, 08:32:26 PM Views: 2776
Summary: Foreign currency hedging can be done a multitude of ways - all depending on what the particular needs are of your trading strategy. It is well known that forex trading is far and away the highest leverage investment. As a result of this exposure to sudden losses, investors seek efficient and low cost ways to cover themselves.

Foreign currency hedging can be done a multitude of ways - all depending on what the particular needs are of your trading strategy.  It is well known that forex trading is far and away the highest leverage investment.  As a result of this exposure to sudden losses, investors seek efficient and low cost ways to cover themselves.

Strategy Is Determined by Need
There are a couple of types of customers who need foreign currency hedging strategies.  The first type is the high risk forex speculator.  The second is the business treasurer or importer/exporter who either owes money in a different denomination (say US dollars) from his own (say Indian Rupee), or similarly is owed money in likewise manner.  The forex speculator is almost certainly going to be seeking a certain amount of exposure and already will have in place strategies designed to create a desired risk profile.

The entrepreneur or treasurer however has an entirely different problem.  A businessmen engaged in the import/export trade has other headaches much more important than trying to figure out whether the Yen or US dollar is going to appreciate relative to the Rupee or Singapore dollar.  The financial executive needs simple, cost effective, low maintenance strategies for managing forex exposure.

Previous Eras Left Small Business Completely Exposed to Forex Markets
In days past the small entrepreneurs were left completely without protection from contractual payment commitments in other monetary denominations.  Foreign currency hedging was expensive and essentially involved engaging a commercial bank, high fees, and many times no coverage outside a certain limited range.  Initially service was poor and costs high however services did expand in the heydays of global banking.

Innovative Products Make Modern Foreign Currency Hedging Easier
Today business managers of all kinds have a variety of choices when it comes to foreign currency hedging.  One of the simplest is the use of forex binary options.  This involves purchasing a fixed dollar amount in a forex binary option hedging contract with either a daily, weekly, or (in some cases) monthly expiration.  The popularity of this type of risk swap is growing rapidly due to its low cost and high efficiency.

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