Currency |
November 01What is Currency Hedging and What are its Benefits?
Currency hedging is a tool or strategy used to reduce the
risks associated with foreign investments. People who invest in foreign
currencies use this method to shield the money they put into the very risky
Forex market.
A majority of Indian investors and exporters also use
currency hedging in India to avoid heavy losses due to the fluctuations in
currency exchange rate. Experts highly recommend using this strategy, owing to
the volatility of Indian rupee against other currencies. This strategy can
protect investors and traders against the depreciation of Indian rupee against
dollar and other major currencies.
Financial institutions that provide hedging services
charge hedge premium for their services. These institutions also provide
currency exchange facility to exporters as well as investors. This allows the
exporter or investor to convert their earnings at the exchange rate prevailing
at the time of entering into the hedging contract.
Benefits of Currency Hedging
· The main advantage of using this approach for
investments in foreign currencies is that it helps reduce risks and losses.
Let’s take a look at a few more benefits of currency hedging:
· This investment approach gives protection to
exporters and importers against exchange rate changes.
· It enables importers and exporters to get
through the times of a bearish market or a crisis in the economy.
· Currency hedging enables importers to take a
long position in the forward contract and thereby eliminate risks.
· It protects the importers and exporters from
translation exposure, which occurs due to the effect of currency fluctuations
on the translation of foreign assets and liabilities.
· Hedging tools can help investors lock their
profits.
· This strategy can help you earn long-term
gains.
· Investing through this method saves the time
that most investors otherwise spend in monitoring their investments regularly.
That’s because it protects them from the risks of the volatility of market and
exchange rates.
· It provides investors with more leverage when
they invest money in the Forex market, which is subject to extreme risks.
· It also protects investors against inflation,
interest rate changes, and commodity price volatility.
With currency hedging,
people dealing in foreign currencies can safeguard their investments by
entering into a contract with hedge funds.
Do you want to invest in foreign currencies or import and
export goods? Then, you should leverage currency hedging for the best results.
Please feel free to ask our experts in case you have any questions.