Posted by forex at 5:31 AM
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1. Understand the nature of foreign exchange risk. Let's say you are exporting goods to Europe and the exchange rate is US $1.25/euro. In other words, for every euro in revenue you'll get $1.25. However, suppose the dollar gets stronger (meaning it takes fewer dollars to buy a euro) and the exchange rate changes to $1.10/euro. Suddenly you are only receiving $1.10 instead of $1.25. That is the risk that currency rate changes pose to international businesses.
2. Open a Forex (foreign exchange trading) business account with a reputable broker. As with a regular brokerage account, you'll need to provide personal identification and information and an initial deposit. Since virtually all Forex transactions are done online, you can open the account that way in just a few minutes. The SEC suggests you choose a broker who is a member of the National Futures Association, which serves as a self-regulating organization.
3. Protect the value of your investment with a forward contract. Forward contracts work like futures contracts, except they are not exchange-traded securities. Instead, the forward contract is drawn up between two private parties (normally through your Forex broker). You agree to buy (or sell) a specific amount of currency at an agreed-on exchange rate, with delivery on a future date. The exchange rate for the forward contract is equal to or very close to the current rate. You and the other party are obligated to complete the transaction. In the example above, you would purchase a contract guaranteeing you could sell your euros for $1.25/euro. The downside of this arrangement is that you forego any windfall profits if the exchange rate happens to go the other way.
4. Set up a currency swap if you simply need the use of a foreign currency for a limited time. In a currency swap, you lend your currency to another party and they lend their currency to you. Both agree to return the currency at the same exchange rate on some future date. For example, you might borrow $100,000 worth of euros to cover short-term expenses in exchange for lending the $100,000 US to a party in Europe. When the time comes, you return the euros and get your dollars back, eliminating the risk of loss from fluctuations in the currency exchange rate.