Posted by forex at 5:36 AM
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1. Understand the dynamics of borrowing currency. If you borrow a currency and the value of the currency goes up, you will owe the lender more money. If the value of the currency goes down, you will owe the lender less money. So there's only risk in the value of the borrowed currency going up in value.
2. Identify the currency you are borrowing and the amount borrowed. Assume you are borrowing $100,000 in euros.
3. Determine the currency that moves either in tandem with the currency you hold or in the opposite direction. You can find this by looking on a currency chart to see which currencies increase or decrease in value in the same way as your borrowed currency. You can also ask your banker or financial adviser for assistance. For instance, the British pound usually moves in tandem with the euro.
4. Calculate the cost of hedging your exposure. Currency options cost a fraction of the price of buying or selling the currency outright. In general, currency options cost approximately 20 percent of the amount you wish to hedge. In this example, the cost of purchasing the currency option is going to be 20 percent of $100,000, or $20,000.
5. Contact a currency broker or your banker to purchase or sell currency options. If the currency you want to hedge with moves in line with the currency you're borrowing, you want to sell currency options on that currency. If it moves against the currency you're borrowing, you want to buy currency options.