| November 01, 2018
What 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 by consulting a stock broker.