Thursday 14 July 2011

Forward Exchange Rates Provide Total Currency Hedging

Investor words defines forward exchange rates as : “The exchange rate set today for a foreign currency transaction with payment or delivery at some future date.” Hence, it is rate that is decided at this moment but traders can pay it on stipulated future date at stipulated time. In a direct contrast to these rates, there are spot rates. In fact, spot rates are the rates with which transactions on foreign exchange market begins. True to their names, spot rates are the rates that are for immediate transactions.

Now, when you are sure that at a particular time and date, you need to pay certain fixed amount to buy a currency, you are in peace. This is called complete currency hedging. As everyone knows, foreign exchange market is extremely volatile and therefore, it is highly risky to trade on this market which requires day to day check. Businesses which are into international transactions often need to be vigilant about these rates and in order to avoid losses, they often have to indulge in forward exchange rates

If you have opted for forward exchange rates, it automatically assures you sound sleep and you will get your money as agreed upon between you and the financial services provider. In this way, it can be said that forward rates are the best solution for currency hedging. If forward contract is the one for the businesses, spot rates are the most common type of rates because it is the real time currency conversion. Once the rate is fixed with which one is going to buy the currency, it will take almost two days to complete the task. In this way, spot rates do provide a bit currency hedge, but there are no guarantees of total currency hedging in spot rates as compared to forward exchange rates.

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