Posted by forex at 1:27 AM
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1. Identify the currencies involved. When exporting something to a country that uses a different currency, there is always an exchange rate risk. The goal when managing Forex risk is to hedge against your currency losing value against the importer's currency. Therefore, the first step to take is to identify the currencies involved in the business transaction. For example, if you are exporting goods from the U.S. to Japan, the currencies to watch are the dollar and the yen.
2. Find the appropriate currency pair. In the Forex market, currencies are always traded in pairs. Each of these pairs represents the value of one currency measured in terms of another. Therefore, if you are watching the dollar and the yen, the relevant currency pair is the USD/JPY. This pair measures the value of the dollar in terms of Japanese yen.
3. Buy or sell the currency pair depending on the situation. In the event that you are exporting goods from the U.S. to Japan, you need to hedge against the dollar losing value to the yen. To do this, sell the USD/JPY currency pair. In the event that the yen strengthens against the dollar, the money you make in the Forex market will offset the value lost in exporting.
4. Choose an appropriate position size. To effectively hedge Forex risk, you should take a market position that roughly matches the size of your real world position. A standard USD/JPY Forex contract represents $100,000. Therefore, if you are exporting $1,000,000 worth of goods, you must sell 10 standard USD/JPY contracts to hedge the position.