Monday, September 24, 2007

Why Hedge Foreign Currency Risk?

International commerce has rapidly increased as the internet has provided a new and more transparent marketplace for individuals and entities alike to conduct international business and trading activities. Significant changes in the international economic and political landscape have led to uncertainty regarding the direction of foreign exchange rates. This uncertainty leads to volatility and the need for an effective vehicle to hedge foreign exchange rate risk and/or interest rate changes while, at the same time, effectively ensuring a future financial position.

Each entity and/or individual that has exposure to foreign exchange rate risk will have specific foreign exchange hedging needs and this website can not possibly cover every existing foreign exchange hedging situation. Therefore, we will cover the more common reasons that a foreign exchange hedge is placed and show you how to properly hedge foreign exchange rate risk.

Foreign Exchange Rate Risk Exposure - Foreign exchange rate risk exposure is common to virtually all who conduct international business and/or trading. Buying and/or selling of goods or services denominated in foreign currencies can immediately expose you to foreign exchange rate risk. If a firm price is quoted ahead of time for a contract using a foreign exchange rate that is deemed appropriate at the time the quote is given, the foreign exchange rate quote may not necessarily be appropriate at the time of the actual agreement or performance of the contract. Placing a foreign exchange hedge can help to manage this foreign exchange rate risk.

Interest Rate Risk Exposure - Interest rate exposure refers to the interest rate differential between the two countries' currencies in a foreign exchange contract. The interest rate differential is also roughly equal to the "carry" cost paid to hedge a forward or futures contract. As a side note, arbitragers are investors that take advantage when interest rate differentials between the foreign exchange spot rate and either the forward or futures contract are either to high or too low. In simplest terms, an arbitrager may sell when the carry cost he or she can collect is at a premium to the actual carry cost of the contract sold. Conversely, an arbitrager may buy when the carry cost he or she may pay is less than the actual carry cost of the contract bought. Either way, the arbitrager is looking to profit from a small price discrepancy due to interest rate differentials.

Foreign Investment / Stock Exposure - Foreign investing is considered by many investors as a way to either diversify an investment portfolio or seek a larger return on investment(s) in an economy believed to be growing at a faster pace than investment(s) in the respective domestic economy. Investing in foreign stocks automatically exposes the investor to foreign exchange rate risk and speculative risk. For example, an investor buys a particular amount of foreign currency (in exchange for domestic currency) in order to purchase shares of a foreign stock. The investor is now automatically exposed to two separate risks. First, the stock price may go either up or down and the investor is exposed to the speculative stock price risk. Second, the investor is exposed to foreign exchange rate risk because the foreign exchange rate may either appreciate or depreciate from the time the investor first purchased the foreign stock and the time the investor decides to exit the position and repatriates the currency (exchanges the foreign currency back to domestic currency). Therefore, even if a speculative profit is achieved because the foreign stock price rose, the investor could actually net lose money if devaluation of the foreign currency occurred while the investor was holding the foreign stock (and the devaluation amount was greater than the speculative profit). Placing a foreign exchange hedge can help to manage this foreign exchange rate risk.

Hedging Speculative Positions - Foreign currency traders utilize foreign exchange hedging to protect open positions against adverse moves in foreign exchange rates, and placing a foreign exchange hedge can help to manage foreign exchange rate risk. Speculative positions can be hedged via a number of foreign exchange hedging vehicles that can be used either alone or in combination to create entirely new foreign exchange hedging strategies.

John Nobile - Senior Account Executive
CFOS/FX - Online Forex Spot and Options Brokerage

The Power of Choice - Using Adversity as the Catalyst for Change

None of us will make it through life without committing a series of mistakes or errors in judgment. I know I have made my share. Mistakes are a part of life. I don't mind making them, however I don't want to keep repeating the same ones over and over.

Some of them have been very costly and downright embarrassing.

Let me share with you one of my biggest mistakes, and more importantly, let me share with you the valuable lesson I learned from it.

It was 1997. I had worked my way out of poverty and had grown my business from a $100 investment into a $200,000 a year income.

I had learned how to make money, but had no clue how to manage it.

An acquaintance of mine, we'll call her Joni, mentioned to me that she was buying a lot of shares of a particular stock, with the expectation that it would soon split or triple in price within a few months. She told me she was investing her life savings into buying as much as she could and that I should do the same.

I thought about it, and at the time, I was saving money to buy my mom a new house so I thought, hey if I took the $30,000 I had saved up and bought the stock - and it tripled, that would be $90,000. Great move, right? (Mistake #1)

Well obviously I had never purchased stocks before and I had no idea how to do it. So what did I do?

I heard my UPS guy, (yes, my UPS guy) invested in stocks so I asked him how to buy stocks. He told me to go to XXX broker in town (who shall remain nameless) and open an account. (Mistake #2)

So I went to the broker, whom eagerly helped me open an account and he completed the transaction that bought me $30,000 of this particular stock. (Mistake #3)

Within a few months, the stock had plummeted and went from $30,000 down to $400. That's not a typo, it had gone down to $400.

I was sick about it. I was incredibly disappointed in myself.

I was upset with the other parties who guided me to create that outcome. I had every reason to be angry. I felt cheated. I mean, I later learned the broker broke the law and never should have placed such a large order for a first time client. They are not supposed to allow beginners to take such large risks.

I had every reason to blame everyone else for what had happened.

But I learned a very valuable lesson during that time and it has served me ever since.

I want to share it with you because I want you to pause and think about this the next time you experience a challenge, a difficulty or a problem in life, especially when you are tempted to blame everyone and everything around you.

Here is the lesson.

You always have a choice.

You see, I could have looked at that situation from a "Nail in My Coffin" perspective: ie "those people did me wrong and it's their fault," and "I'll never buy another stock again"


I could have looked at it as a "Catalyst for Change" perspective. ie "I am responsible. I made the decisions, I didn't do my diligent research, I invested too much on my first trade, I will take a step back and re evaluate my approach next time."

Let me simplify it and break it down even further:

Problem: lost $29,600 in stock trade

My Choices:

Nail in Coffin = I am a Victim and I give my power away when I blame others


Catalyst for Change = I emerge the Victor because I claim my power to change the present and the future by taking responsibility

You see, I could have easily put the blame on everyone else. And if I did that, I would never have learned the lesson. I would have never changed. Though it wasn't easy, after looking at it, I knew there were a number of things I could have done differently.

Whenever you focus blame outside of yourself, you give your power away. Whenever you take responsibility, you claim your ability to change, grow, and create different outcomes in the future.

I knew that despite the appearance of the circumstances, that I was responsible for that loss. I made a series of errors in judgment, as well intentioned as they were.

As long as you blame others outside yourself, you will not change. Nothing will change for you. You will be doomed to repeat the same mistakes.

You always have a choice.

Liberate yourself by taking responsibility for your actions, even when you can justify placing it outside yourself. Let your mistakes serve you. Learn from them, let them change you for the better. Let them empower you.

I turned one of my biggest mistakes into one of my greatest lessons and by taking 100% responsibility, I allowed it to serve me. I took back my power.

I used as a catalyst for positive change.

"Every problem contains within it the seed of an equal or greater opportunity. Not just some of the time, but all of the time." -Jill Koenig

The facts remained the same, I still lost $ 29,600. But it doesn't hurt anymore. My perspective on it changed.

It became a blessing that has served me many times over.

When you change the way you look at things, the things you look at change.

Live Your Dreams

Jill Koenig, the "Goal Guru" is America's Top Goal Strategist. A best selling Author, Coach and Motivational Speaker, she is an expert on the subjects of Goal Setting, Time Management and Business Success. Her Goal in life is to help you UNLEASH your untapped potential. Get your FREE Goal Setting CD at:

Media Requests: Jill Koenig is a dynamic high energy TV and radio guest available for interviews and corporate speaking engagements.