Posted by forex at 8:56 AM
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1. Gather details of the transaction. You will need to know the two currencies involved and the date of the transaction. For most currencies, you can easily find published forward rates. Those are the expected exchange rates at a specific point in the future, most commonly 30 days, 60 days, or 90 days. While major economic events may cause major changes in forward rates, the 30-day forward rate is often fairly accurate and can tell you if the currency will rise or fall compared to your home currency.
2. Examine hedge options. The easiest type of foreign exchange transaction is a spot exchange, which uses current rates. A spot does not protect you from currency risk. A forward transaction is a contract to exchange a specific amount of currency at a specific price on a defined future date. This locks in the price and prevents any gain or loss from currency fluctuation. A currency option is a contract that allows you to buy a specific amount of currency at a specific price at a given date, but gives you the option to exercise the contract or not if the exchange rate benefits you. There is an up-front cost for the options contract no matter if it is exercised. A currency swap is a transaction between two companies, usually with a middleman, that allows each company to “swap” the exchange risk at a lower cost.
3. Depending on your situation, choose the appropriate hedge. Each type of hedge has different costs and risks, and each foreign currency transaction is different. Choose either a spot, forward, option, or swap contract based on your desired level of exposure and cost.
4. Purchase your desired contract. Many brokerage firms, banks, and foreign exchange firms can offer you a contract or combination of contracts to manage currency risk as you wish. However, each firm and contract has different fees, so it is best to shop around for the best option.