There are many ways people deal with foreign currencies every day. From travellers exchanging currencies in preparation to go on holiday abroad to professional forex traders, whenever you are dealing with the currency of another nation there is always plenty of risk involved, whichever way you are trading.
Many real world events can introduce a lot of risk to the currency you have invested in, such as the recent steps China has taken to internationalise the renminbi. This could lead to a weakening of the US Dollar, which will have huge consequences for the forex market and other areas. Here’s how to best protect yourself against risk when trading currencies.
Invest in Hedged Assets
There is a cost involved in hedging but it is more than worth it and can save a lot of money to combat risk. Hedged exchange-traded funds (ETFs) is a security that tracks an index, commodity or bond and trades like common stock on the stock exchange.
The main advantage of hedging foreign assets in your portfolio is that you do not lose any money if the currency your investment is in depreciates. The counter is that neither do you profit if the currency happens to appreciate, but this is a measure to avoid risk in the first place. These are best for individual investors and small amounts as they are marginable.
Research and Buy Undervalued Currency
Start your research by finding information about a country’s current account deficit and see how large it is. Where it is big this could mean it has become overvalued and uncompetitive. Or if one country has a high inflation rate to another it will lose its competitiveness over time.
Take advantage by investing in such undervalued currency and wait until it appreciates. If it is definitely already undervalued then there should be little risk that it will fall much further. This is useful for both individuals and companies when avoiding risk with foreign currencies.
Seek Professional Help
For those who are still not completely confident and worried about the risk involved when dealing with foreign currencies, whether as part of a business transaction or something else, using professional services is advised. This can cost a bit but is more cost-effective than going alone and the risk becoming a reality.
Ebury can help businesses efficiently pay invoices in hundreds of currencies, receive overseas payments and do so much more to eliminate any risk. When dealing with foreign currency it is highly advisable to take as many steps as possible to minimise and hopefully eradicate any risk that may be involved.