Posted by forex at 9:21 AM
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1. Identify your foreign exchange exposure. How much money is at risk from possible changes in exchange rates? What currency pairs are you exposed to? Also determine the chances of exchange rates moving against you. You can use expert opinions and analysis from business news agencies such as Bloomberg or from specialized publications such as the Institutional Investor (a journal for hedge fund managers).
2. Learn as much as you can about different hedging instruments and strategies. You can find information about hedging in specialized books. Do not go for books for 'dummies,' but rather choose volumes written for professional traders and investors. With professional-quality information, you will be better equipped to manage such complex things as foreign exchange exposure.
3. Construct your own hedging strategy. Remember that the less currency risk you decide to assume, the costlier your hedging strategy will be.First, try to minimize your exposure by linking outgoing and incoming cash flows denominated in the same currency. For example, you can link revenues denominated in a particular currency with costs you incur in that currency, so if costs rise as a result of an adverse exchange rate move, your revenues will automatically rise as well.Another type of hedging you can consider is buying options. An option is a financial instrument that gives the buyer the right, but not the obligation, to buy or sell a given amount of currency at a certain price (strike price) by a specified date (maturity). The better terms an option has ('locks in' a good price), the more it costs.
4. Execute your strategy. Remember that managing foreign exchange exposure is a continuous activity and you should constantly monitor developments in the foreign exchange market and adjust your strategy accordingly, decreasing or increasing your hedge.