What is Currency 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.

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.

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.

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.

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.

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.

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.