What do you understand by the term exchange rate risk? It is the risk that a business' operations or an investment's value will be affected by changes in the exchange rates. Let's see one example to see how negative movement in exchange rates can be risky for traders and how spot rates and forward exchange rates minimize this risk factor.
Suppose, you have purchased American dollar by exchanging British pound or sterling. Now, the price of American dollars starts decreasing suddenly so you will not gain any profit if you sell them instead you will count a big loss. Now, you might be thinking that why we are selling the currency when the market is down? Can't we wait till the market rise again? Well, it is not always possible in the real life scenario.If you have purchased a home abroad and you have make a deal that you will pay the seller after 2 month. The time when you make this deal the rate was GBP/USD=1.054 but it falls to 20% when you actually made the payment.
Exchange rates changes at every second and impacts on retail as well as businesses who make international payments. Many forex companies are offering currency hedging service to minimize investment risk. Forward exchange rates is the rate decided between the client and the company in current date for the future payment delivery. Spot rates are also offered for currency hedging but in this service you need to complete the payment within 2 days only. Choosing forward exchange rates, you need not to worry for any negative movement in the exchange rate but at the same time you must be ready to leave profits in case the market moves in positive direction. Once the rate is locked, you are obeyed to execute your payment with this decided rate only. You will be given a specific duration like 2 month, 6month or may be 1 year to make the payment.
Suppose, you have purchased American dollar by exchanging British pound or sterling. Now, the price of American dollars starts decreasing suddenly so you will not gain any profit if you sell them instead you will count a big loss. Now, you might be thinking that why we are selling the currency when the market is down? Can't we wait till the market rise again? Well, it is not always possible in the real life scenario.If you have purchased a home abroad and you have make a deal that you will pay the seller after 2 month. The time when you make this deal the rate was GBP/USD=1.054 but it falls to 20% when you actually made the payment.
Exchange rates changes at every second and impacts on retail as well as businesses who make international payments. Many forex companies are offering currency hedging service to minimize investment risk. Forward exchange rates is the rate decided between the client and the company in current date for the future payment delivery. Spot rates are also offered for currency hedging but in this service you need to complete the payment within 2 days only. Choosing forward exchange rates, you need not to worry for any negative movement in the exchange rate but at the same time you must be ready to leave profits in case the market moves in positive direction. Once the rate is locked, you are obeyed to execute your payment with this decided rate only. You will be given a specific duration like 2 month, 6month or may be 1 year to make the payment.
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