http://moneytransfercomparison.com/hedging/ - Learn about forex hedging offered by commercial foreign exchange companies.
Hedging your foreign exchange exposure:
Don't let the volatile currency market impact your financial wellness! If you need to move significant amounts of money aboard you should consider hedging your transactions.
MoneyTransferComparison.com is proud to present the most popular FX options offered by commercial foreign exchange companies. They are readily available by the most recommend companies on our website.
1. Forward Transactions – The Basic Hedging Tool
This function is the most standard option used. What it transpires is that you have an agreement between you and a counterparty (currencLy company) that states exchanging a certain amount of currency at a specified future date for a rate that is pre-determined.
To execute it, you need to deposit 10% of the volume upfront, and in return you will not have to worry about the rate for a period of up to 12 months.
Another approach to this is to set a specific rate that you would like to trade at for your currency exchange. For example, if the current GBP/USD exchange rate is 1.56, you could set a limit and ask your trader to complete the trade when the GBP/USD rate is 1.60. Thus, at that exact moment in time when the transaction takes place, you would be able to buy your your currency for a better rates.
The benefits of this are that you control the rate that you are exchanging for and the negatives are that the rate you set may never reached if it does not occur in the market.
Stop Loss Order
A stop loss order becomes beneficial when you are trying to hedge yourself against negative movements in the market. If the GBP/USD rate is 1.56 and you are trying to be able to gain if the rate increases, you could set a stop loss order at 1.54, which would be the worst rate that you would be willing to trade at.
The benefits of this are that you are protected against negative market movements; however, the negatives of this that you may prevent yourself from getting the best possible rate by being caught in a yoyo market.
One Cancels Other Order
This currency trading device is a hybrid of the limit and stop loss orders. What this option allows you to do is to set a stop loss at 1.54 and then a limit order at 1.58. If and when either of these rates is reached, the transaction will get executed at that exact moment. The benefits of this sort of transaction is that it protects you from the negative market swings while also allowing you to take advantage of the upswings in the market. Conversely, the negatives are that you have limited upside potential.
Time Option (Flexible Settlement)
If you are unsure about the exact acquisition date of your transaction, this option will allow you flexibility for the date that you execute the transfer. The forward rate will be identical and will usually not involve a premium payment.
When thinking of a call option, it is essentially an agreement to buy a certain asset at a specified future date at a particular pre-determined cost. For example, GBP/USD for a one year call option with a strike of 1.54 allows you to buy GBP and Sell USD for one year at a time for the rate of 1.54. If the spot rate ends up being higher than your strike, then you would be able to buy at the strike rate and conversely, if the spot rate is lower than the strike, you could ignore the transaction and buy directly in the market.
While this provides great flexibility, you do usually have to pay a premium to enjoy such benefits, which should be added to your financial calculations.
By utilizing a put option, you have an agreement that gives the potential to sell an asset that was a pre-agreed upon strike rate. If you have GBP/USD for a one year put option with a strike of 1.54, you are able to sell GBP and buy USD one year at a time at a rate of 1.54. That being said, if at that current time, the spot rate is lower than the strike, you would exercise the option and make a profit.
If you buy option on GBP/USD with $300,000 and you sell a call option of the same currency pair with $150,000 and the GBP/USD rate goes to 1.58, you would make fx gains and would pay half of the gains that you made to call the option buyer ($150,000). In the same instance, if the rate went down to 1.50, you would make losses on the transaction and the put option seller would pay you any loss on the full ($300,000).