What is Currency Hedging?

To understand currency hedging, it’s pertinent to know about currency risk. Any business dealing with foreign currency is exposed to currency risk. An importer has payables in foreign currency while an exporter has receivables in foreign currency. Any fluctuation in either direction can bring instability to the business. It applies the same to the investors investing in the foreign exchange markets. They are exposed to the sensitivity to change in the value of an asset.

Here comes into play the currency hedging. It is the use of derivatives contracts like futures and options to manage this financial risk. Hedging is like insurance in which the change in the value of the derivative contract will offset the change in the value of the underlying asset, in this case, currency.

A very simple example would be to buy a future contract at a pre-specified price which fixes the currency exchange rate of some-time down the line.

To ensure hedging for the first time, start with conducting excellent research required in the respective market. The second step would be to back test or practice your hedging strategy in a risk-free environment to be ready for the real market. Finally, open the trading account or continue with your account if your broker provides you with this service. Findoc provides its customer the option to add currency trading in their platform with few simple steps.

Why is this necessary?

An investor or businessman primarily takes an opposite position from which has been created in the physical market or cash. There are some imperative advantages points for currency hedging are:

Helps in mitigating the loss

This is the first role that hedging plays when it comes to our portfolio, it manages the risk.

Hedging

Hedging increases the liquidity in the financial markets.

Hedging

Hedging saves time by preventing the investors track the currency prices time and again.

Protects the profits

While investing in foreign company shares, the supreme objective is to protect the return gained over the same. This can be done by removing currency risk and protecting profits.

What are the ways to hedge your currency in India?

When it comes to currency hedging in India, there are two broad ways via futures contracts and options contracts. Currency futures were introduced in India in 2008 on NSE and then extended to other exchanges. While entering a futures contract, the investor specifies the exchange rate at which they want their capital to be converted. While currency options are the derivatives contract which provides you an obligation to buy or sell the currency at a fixed rate by paying a premium.

Benefits of Currency Hedging

It mitigates the currency risk and losses for the foreign investment since the price of currencies are volatile.

Helpful for the investors who have no time to track their portfolio.

The process can turn out be the biggest saviour in times of economic downturn and bearish market periods.

Protection against inflation, interest rate changes, commodity price volatility and currency exchange rate fluctuations.

Why invest with FINDOC ?

Findoc provides you with a compulsory and convenient way to hedge your currency risk in the four pairs of currencies traded in India namely Dollar, Euro, Pound, and Japanese Yen against Indian Rupee. Reasons to choose Findoc as your trading platform:

We are the members of the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and provide depository services through NSDL.

Select conveniently the exhaustive pairs of currency available to trade in India with our platform.

The platform is well secured and equipped with progressive technology so that you can have access to everything required.

You need not open another account for trading in currency. We provide a hassle-free one-stop solution to all your trading needs under a single umbrella.

Get exclusive access to our extensive research provided via daily and weekly newsletters. This can help you hone your edge in the stock market.

Experience anywhere trading with our platform accessible via mobile app, desktop, and also call-n-trade.

We provide you with a competitive brokerage to preserve your return in every way possible.

Never miss any trade with our round the clock web-enabled customer service support facility.

Findoc is a reputed name in the financial service industry which brings you a sense of security with your trading positions.

Frequently Asked Questions

What are the types of hedging?

The hedging can be divided into three types which will help investors protect their portfolio from unwarranted risks of currency, commodities, etc. i. Forward Contract: Over-the-counter contracts to buy or sell a commodity on the future date at a specified price. ii. Futures Contract: This is a standardized contract which works on the similar grounds as the forward contract. iii. Money Markets: Hedging can also be done with the money market instrument which have a maturity of one year or less.

Should I buy currency hedged ETFs?

The currency hedge ETFs are the funds that remove the currency risk of price fluctuations. ETFs are available for a number of underlying assets in the most major markets. This provides you with an opportunity to invest in the funds which were primarily accessed to only institutional investors. It provides you an opportunity to globally diversify your portfolio. The benefit of hedge ETFs is the cost-effectiveness, larger ETFs can hedge risk at fraction of hedging cost than cost incurred by an individual investor.

Should you hedge currency risk?

In order to mitigate the exchange rate risks and to know the certainty of payments. The hedging helps you in taking timely decisions as your business is immune to the currency’s fluctuation. There can be a time lag between your purchase and payment which can give rise to currency appreciation or depreciation. Such hedging will help your business to relieve from the constant process of tracking currency movements.

When should you hedge currency?

An investor should include hedging currency in its portfolio when it is largely exposed to the price fluctuations of the currency. While investing overseas or dealing with the overseas business, such strategies can act as a defender to unforeseen risks.

Is hedging a good strategy?

Hedging help your portfolio protect itself from unforeseen risks. The markets are tough to predict and should be left to the professionals only. Hedging is not only an excellent strategy but holds a vital role when you have a large portfolio. It is a technique which will crucially reduce your potential losses, which holds equal importance to making money. Whether or not you accept this, risk is an essential yet delicate component of investing. Hence, no matter what kind of investor you are, having some knowledge of hedging is required.

How does a currency hedging work?

Currency hedging is like buying an insurance to protect yourself from the currency movements. It reduces the impact of the fluctuations of currency on the value of your portfolio. As the history suggests, the currency can be severely volatile and so proper hedging is the only answer. There are two ways to manage currency hedging- one via forward contracts in which currency fluctuation will work in favour and second is options contract in which the impact of currency movement can be reduced.

What is currency hedging in India?

A foreign exchange market currency hedge is a transaction that is implemented to protect and prevent an existing or anticipated position from falling into losses. Currency hedging is somewhat similar to stop losses. Since the foreign markets very much influence the Indian market, currency hedging helps minimize losses and protects you against exchange-rate volatility which means the tendency of foreign currencies to appreciate and depreciate. RBI has now made currency hedging in India compulsory.

Currency Hedging Blogs

How is currency hedging effective for exporters?

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Currency Exchange Hedging Strategies x Trading?

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Why should an Investor deploy Currency Hedging Strategy

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Disclaimer The information contained in this file is provided for informational purposes only, and should not be construed as legal advice on any matter. The content and interpretation of the law addressed herein is subject to revision. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this file to the fullest extent permitted by law. Every effort is made to avoid errors. In spite of that, errors and discrepancies may creep in. It is expressly stated that neither Findoc Investmart Private Limited nor any of the contributors of updates will be responsible for any damage to anybody on the basis of this document. Readers are, therefore, requested to cross check with the original sources e.g. Government publications, Orders, Judgments etc., before taking any action or making any decision. These services are being provided through our group companies Findoc Capital Mart Pvt Ltd and Findoc Finvest Private Limited

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Important Message The information contained in this file is provided for informational purposes only, and should not be construed as legal advice on any matter. The content and interpretation of the law addressed herein is subject to revision. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this file to the fullest extent permitted by law. Every effort is made to avoid errors. In spite of that, errors and discrepancies may creep in. It is expressly stated that neither Findoc Investmart Private Limited nor any of the contributors of updates will be responsible for any damage to anybody on the basis of this document. Readers are, therefore, requested to cross check with the original sources e.g. Government publications, Orders, Judgments etc., before taking any action or making any decision. These services are being provided through our group companies Findoc Capital Mart Pvt Ltd and Findoc Finvest Private Limited

Attention Investors
  • 1. Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020.
  • 2. Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.
  • 3. Pay 20% upfront margin of the transaction value to trade in cash market segment.
  • 4. Check your securities / MF / bonds in the consolidated account statement issued by NSDL/CDSL every month.
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