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How to Best Mitigate Exchange Rate Risk

The foreign exchange is a huge and very active market. It carries one of the biggest volumes in terms of value and size and is also participated by the most number of traders. It has become quite popular despite its relative newness in the financial industry and there is a reason why. It is because although it carries risk just like other markets, it is also one of the quickest moving. This means you have more time to make more trades to increase your chances of profit provided, of course, that you’ve done your research and made informed decisions.

All in all, forex is a great field for profit. However, traders are only ever as good as their ability to mitigate risk. The foreign exchange risk is a risk that is ever present in the forex. It is unavoidable and is caused by generally, foreign investing. So if you want to completely avoid facing on this risk, then the answer is simple: avoid forex investment altogether. Now, for those trades that would rather risk a little to profit big then read on.

The best way to mitigate it is to use various hedging techniques such as diversification and timed investments. However, it’s not as simple as that.

Hedging must be made using a methodical approach. Hedge by investing on overseas assets such as hedge exchange-traded funds. Diversify your portfolio by including local and foreign assets.

Use the following instruments to hedge currency risk:

1. Currency Options

2. Currency ETFs

3. Currency Futures

4. Currency Forwards

By doing this, you will be able to mitigate a considerable amount of foreign exchange risk.

 

Created by : Joan
Published : 05 Nov 2015

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