Advice for International Investors on How to Safeguard Their Profits

What are the risks?

Today, investors are increasingly turning to global markets to find opportunities for profit, giving urgency to the issue of protecting returns from foreign exchange risk. While there are many excellent investment opportunities to be found all over the world, volatility in the currency markets can and does affect the profitability of these investments. An understanding of how currency rate movements can affect profits can help investors protect their bottom line from this uncertainty.

A vivid example of how currency volatility can impact profits occurred in 2004. When the US stock market rallied, investors from Europe converted their euros into dollars and sent them to America to take advantage of these opportunities. Even though there was a 30% gain in the US stock market that year, it was accompanied by a 22% decline in the value of the dollar. Although the European investors had earned substantial returns on their stock investments, their profits were reduced considerably when converted back into euros because of the decline in the dollar.

Investors in other markets are also exposed to currency rate risk. When interest rates increased in the UK, many investors sent capital from all over the world to profit from these higher returns. However, at the same time, the price of the US dollar versus the pound sterling was subject to great volatility -as much as 11% in 2004! Because of this, the amount those American investors took home varied greatly depending on when they chose to convert their profits back into dollars.

Exchange rate risk can be a threat to your profitability when investing abroad. While it is impossible to predict exactly where the markets will go, you can protect yourself from this kind of volatility. Read on to learn how easy it is to hedge against currency exchange risk by taking a position in the spot foreign exchange market.

How to protect your profits

Protecting your investment profits by hedging in the spot currency market is simple and inexpensive, and completely protects your account against currency market volatility. Hedging entails taking a position in the market so that the effects of foreign exchange movements are neutralized, and gives you the peace of knowing that your profits are not vulnerable to movements in the currency market.

The principle of a hedge is simple. An investor who has invested his funds abroad wants to make sure that he is protected if the currency of the country he has invested in depreciates. Depreciation in the value of the foreign currency would mean that he gets less of his home currency when he converts his profits. The simplest way for an investor to avoid a loss like this is to sell the currency of the country where he has invested in the spot currency market. If it depreciates in value, he will profit from his spot position.

In an example taken from go currency.com someone from the UK who is investing 300,000 pounds in the US wants to make sure that when he takes his profits home, he is protected if the dollar gets weaker. To do this, he would sell dollars in his trading account so that he profits if it does get weaker. When he converts his investment funds back to pounds, his gains in the currency market will cancel out any losses caused by exchange rate volatility.

All hedging takes is a little foresight and a trading account. The total transaction cost of a hedge is minimal-only $150 in the example above. Any losses of investment capital are completely offset by gains in a currency trading account, making hedging an inexpensive and very efficient way to protect against substantial risk.

Article created by Gerron Richard Woodruffe.

Gerron Woodruffe is an affiliate of gocurrency.com. Go currency is a free online currency rate converter.

---

Can Using Sales Leaseback Method of Investment Property Acquisition Reduce Risk?

Sales Leaseback compared to traditional property investmentCan a Sales Leaseback... Read More

The Convertible Craze Brightens The Future Of Equities

Convertibles are stealing the show with their safe investment image... Read More

Have Analysts Gotten Honest?

It caught my attention when I heard an analyst on... Read More

For Entrepreneurs A SIMPLE Plan May Be Best

Q: I own a small decorating business and I'll be... Read More

Investing: The Art Of Making Your Money Work For You

There is a lot to know about investing. It all... Read More

Realistic Investing Expectations

Over the long term stocks have provided us with great... Read More

Love The Thrill of Risk? Invest in an Annuity!

With the stock market in steep decline, people are looking... Read More

The Biggest Oil Opportunity in the World ? And How You Can Profit From It

Where is the second biggest deposit of oil reserves in... Read More

Invest or be Pink Slipped

Firing an employee seems to be easier and easier for... Read More

Super Rules, OK?

Do you rule your superannuation or does it rule you?It's... Read More

Introduction To FOREX

The Foreign Exchange Market, better known as FOREX, is a... Read More

Why You Need To Buy and Sell Gold Coins (Part 3)

Putting Rare Coin Market Cycles to Work for You...Until recently... Read More

Franchise Opportunity Sellers Beware; franchise buyers lie on forms?

It seems completely absurd that franchise buyers lie about their... Read More

A Secret Revealed: Why Most (Day) Traders Fail

The following perspective on (day) trading comes from my many... Read More

Understanding The Real Rate of Return!

There is one indicator more than any other which determines... Read More

July 2005: Hurricane Forecasts for Weather Traders

Tropical Storm Arlene formed as a tropical depression on June... Read More

The Perfect Economy?

The U.S. economic data reported this week showed strong output... Read More

Preparing to Invest: How to get started

Investments can be a source of great potential earnings. The... Read More

Building The Foundation For Wealth

You wouldn't build your home on anything less than a... Read More

Approaches to Investing

Here is a small summary of the three major approaches... Read More

Success Trading: More Basic Terminology for New Traders

One important aspect of trading the markets is to understand... Read More

Risk and Reward

If you are doing your own investing in the stock... Read More

When Its Too Late to Save for Retirement

You are 55 years old (or somewhere around there) and... Read More

Options Education : Opinion versus Fact!

The most basic aspect of trading is learning to differentiate... Read More

Your Portfolio and ?Old Ironsides?

The USS Constitution first ventured into the waters in 1798.... Read More

Use of a Franchise Business as a Family Tax Planning Strategy

Suggesting the use of a franchise business as a vehicle... Read More

Numismatics are for Collectors, Not Investors

As a precious metals investor, you may heard much about... Read More

How To Start Investing For Financial Independence, Part 1

Today, I am going to start a multi-part series about... Read More

How to Calculate the Value of Your U.S. Savings Bonds

If you're like many Americans over the age of 55,... Read More

Part II of Day Traders and Swing Traders and Options? Maybe!

Before every protective put trade it is possible to calculate... Read More

Use this Simple Trick its to Buy $100 Bills Direct from your Bank for only $97

Most People just don't understand the power of using their... Read More

Almost Anyone Can Open A Roth IRA!

The Roth is kind of weird until you get used... Read More

Four Key Components To Building A Trading System

Need some insight on what you should really be striving... Read More