Managing Your Foreign Exchange Risks
Canada is at the position in the world as an export of agricultural goods. This exposes farmers to the volatile foreign exchange risk. Moreover, investors and travelers are also exposed to the risk. Moreover, due to the ever-evolving market, Canada is linked to the global economy as well. This further increases the risk of exchange rate movements that farmers, businesses, and investors are exposed to.
The Canadian dollar is especially vulnerable to the fluctuations in the U.S. dollar, because it is one of the dominant currencies around the globe. Therefore, you can hedge the exchange risk by using various tools available in the market. Before diving into that, let’s take a look at the factors that influence the exchange rates as it will allow you to better understand how you can tackle the risk.
Factors Affecting Exchange Rate
The key factors that impact the rate and cause market fluctuation include
• Interest rates
• Inflation
• The political and economic situation
• Market sentiments
• Monetary policies
• Gross domestic product
• The unemployment rate in a country
• Commodity prices
• Fiscal policies
• Government debt, and
• The balance of payment.
• Interest rates
• Inflation
• The political and economic situation
• Market sentiments
• Monetary policies
• Gross domestic product
• The unemployment rate in a country
• Commodity prices
• Fiscal policies
• Government debt, and
• The balance of payment.
For example, when central banks increase the interest rate, it attracts investors and they bring foreign capital into the country from other countries, which results in the appreciation of currency value. Speculators anticipate the increase in value ahead of time, causing the currency to appreciate further. On the other hand, if the government debt in a country increases, it becomes risky for investors and they start selling bonds in the open market to mitigate their risk. It results in the depreciation of currency value and causes the rate to fluctuate.
Therefore, it is very important to be aware of all the factors that cause the rates to move and down. It will allow you to calculate the actual exchange rate and enable you to avoid unnecessary hidden cost charged by different banks and foreign exchange dealers.
Now let’s look at various ways to manage your foreign exchange risk.
Now let’s look at various ways to manage your foreign exchange risk.
Analyze the Market Rates
It is very important to analyze the market on a regular basis to understand the reasons behind the rate fluctuations. Read news and press releases to get a better idea of the exchange rate movements. This will enable you to anticipate the increase or decrease in rates in advance and you will be in a better position to save money, especially if the transaction involves a lot of cash.
It is very important to analyze the market on a regular basis to understand the reasons behind the rate fluctuations. Read news and press releases to get a better idea of the exchange rate movements. This will enable you to anticipate the increase or decrease in rates in advance and you will be in a better position to save money, especially if the transaction involves a lot of cash.
You can also minimize the risk exposure by dividing the money. If, for instance, the rate of a Canadian dollar against the U.S. dollar is expected to be 0.75 and it will increase to 0.77 by mid of May, you can exchange a portion of your money at the beginning of May and the rest of it by the 15th of May. By doing that, you will be charged an average of the two rates.
Calculate the Foreign Exchange Risk Exposure
To minimize your overall risk, you can use various hedging tools. However, before doing that, it is important to calculate the risk exposure in order to find out whether you should go for hedging or not. Hedging a risk also comes at a cost. Therefore, carry out a cost-benefit analysis before entering into an agreement.
To minimize your overall risk, you can use various hedging tools. However, before doing that, it is important to calculate the risk exposure in order to find out whether you should go for hedging or not. Hedging a risk also comes at a cost. Therefore, carry out a cost-benefit analysis before entering into an agreement.
Hedge the Risk
You can use various hedging tools to minimize the foreign risk exposure. For example, if you are anticipating that the rate will increase in the future, you can enter into a forward rate agreement. By doing that, you will be fixing a rate today, at which the foreign exchange transaction will be executed. On the transaction date, if the market rate is higher than the forward rate, you will be in profit. You can also use other hedging strategies, such as future agreements or SWAP. However, make sure the cost of hedging does not outweigh the benefit associated with it.
You can use various hedging tools to minimize the foreign risk exposure. For example, if you are anticipating that the rate will increase in the future, you can enter into a forward rate agreement. By doing that, you will be fixing a rate today, at which the foreign exchange transaction will be executed. On the transaction date, if the market rate is higher than the forward rate, you will be in profit. You can also use other hedging strategies, such as future agreements or SWAP. However, make sure the cost of hedging does not outweigh the benefit associated with it.
Compare Rates Offered in the Market
You can also use the services of foreign exchange dealers. Compare the rates offered by different dealers and choose the best one. You can also find an online dealer that allows you to transfer funds at the comfort of your home. Before executing a transaction, they send you a confirmation message to ensure transparency of their service. In fact, the rates offered by them are much lower than what banks charge.
You can also use the services of foreign exchange dealers. Compare the rates offered by different dealers and choose the best one. You can also find an online dealer that allows you to transfer funds at the comfort of your home. Before executing a transaction, they send you a confirmation message to ensure transparency of their service. In fact, the rates offered by them are much lower than what banks charge.
