Posted by forex at 1:13 AM
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1. Identify your FX exposure. Think about what cash flows you need to convert and to what currencies. Evaluate the likelihoods of FX moves of currency pairs that you are exposed to. You can use expert foreign exchange forecasts from investment banks or hedge funds to help you with this task.
2. Learn about different hedging options. The best thing for you here is to get as much information about Forex hedging as possible. Read specialized books and check business news agencies such as Bloomberg for more up-to-date information about new hedging products. Specialized publications like the Institutional Investor can also help (this publication is read by hedge fund managers and makes fairly sophisticated reading).The most popular hedge against currency risk is a Forex option. A Forex option is a financial instrument that gives the buyer the right, but not the obligation, to sell or buy a specified amount of currency at a given price (strike price) by a certain date (maturity)
3. Choose a hedging instrument that suits your currency risks better. You should know, however, that the more risk you want to hedge, the costlier the hedge will be. After you have analyzed your currency exposure and the available hedging instruments, you may still be willing to assume some part of the FX risk.
4. Execute the hedging. Monitor the foreign exchange market for any unexpected developments and adjust your hedging accordingly. Perhaps you will be able to sell a part of your hedging portfolio. Or you may decide to buy more hedging products.