A significant number of individuals and businesses now make international money transfers for an assortment of reasons. For instance, while a parent might need to pay a child’s international tuition fees, a small business owner might need to pay an overseas supplier. No matter what the scenario, sending money overseas exposes you to foreign exchange risks. Fortunately, there are measures you may take to minimize the impact.
How to Minimize Foreign Exchange Risk?
Whether you wish to send money overseas as an individual or a business, you get to choose from different hedging alternatives to make the most of exchange rate fluctuations. However, not all banks and overseas money transfer companies provide the same alternatives.
With a forward contract, you enter into a legal agreement to carry out an overseas money transfer at some point in the future by fixing an exchange rate in advance. This eliminates the risk of any negative fluctuation in exchange rates, and you do not have to worry about the prevailing exchange rate when the transfer is to take place. Some money transfer companies let you lock in exchange rates for up to two years.
Limit and stop loss orders
With a limit order, you get to set an exchange rate that is better than the existing rate, and once the market reaches the desired level, your transfer goes through automatically. With a stop loss order, you get to set the minimum exchange rate at which you are willing to carry out your transfer. Both orders may run together, giving you the ability to target a better than prevailing rate while also protecting you against any significant drop.
Money market hedge
Businesses may choose to go this way, although this route requires carrying out transactions based on prevailing rates. In this scenario, you may buy or borrow foreign currency and hold it until the time you wish to carry out the trade. The money you hold in the foreign currency, in the meanwhile, earns interest.
This is another option presented to businesses. In a typical forex swap, two parties enter into an agreement to exchange two different currencies in equivalent amounts for a given time period, and then reverse the exchange later. These swaps take place at predetermined exchange rates.
Using a multicurrency account gives you the ability to hold funds and transact in different currencies. When you make payments from or receive payments in accounts denominated in matching currencies, you do not have to worry about exchange rates because no exchange of currencies takes place. Currency exchange takes place when you add funds into your multicurrency account or make withdrawals into your local bank account, and you get to decide when to do this.
While you cannot avoid risks associated with foreign currency exchange completely, following a few simple measures can help minimize your exposure to the volatility the market tends to experience. However, since individual requirements tend to vary, compare your alternatives only after addressing your own needs first.