What is currency risk?

January 17, 2018 (Investorideas.com Newswire) The money can be converted from one currency to another currency. The money value will increase or decrease based on the foreign exchange rate. The currency disk deals with the potential gain or loss that you make by holding the currency. The currency should be converted if you would like to purchase products or services from another country. You should want to convert the money for overseas investment as well. You should be aware of the factors that influence the currency value so that you can buy or sell the currency at the most appropriate time.

Currency movement

As per the currency risk definition, it is the financial risk involved in the purchase or sale of foreign currency. It is also called as foreign exchange risk. The risk arises due to the change in money value. Investors and businesses are exposed to currency risk when they have assets in foreign countries. If currency rate increase, the asset value will increase. Thus, the profitability is very much enhanced. Similarly, the profitability will decrease with the decrease in currency rate.

If you would like to offset the currency risk, you can implement the hedging technique. If you invest stocks in another country, the returns will be affected by two parameters. The change in currency value, as well as the change in stock price, will have an impact on the stock value. If the foreign stocks gain 25% and the exchange rate decreases by 15%, the effective profit from shares will be 10%.

How to deal with currency risk?

As currencies move on a regular basis, there will be an opportunity as well as a loss by holding foreign exchange. If you invest in stocks of foreign companies, you should figure out ways to minimize the risk.

By implementing the hedging strategy, you can minimize the currency risk. Hedging is not but an act of minimization of the loss of value due to change in currency rate. The hedging technique is applied in futures and options as well.

You can consider financial hedges as insurance policies. As you insure your property against natural calamities such as fire and flood, you will insure your foreign currency by going for hedge. You will set aside a fixed or percentage of money to cover the risk. You will want go for hedge funding as you will pay the fraction of the amount that you might lose during worse eventuality. You will be aware of the maximum loss that you might suffer as per your investment value. Hence, you will go for hedge funding in proportion to the investment value.

By going for hedge funds, you can cover wide range of risk factors. You should also understand the fact that the hedge funding will also limit your profitability. You will want to pay the hedge fund even though the foreign currency is on the upward trend. Highly sophisticated investors will go for hedge funds so that various kinds of portfolios will be saved in a very efficient manner.

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