# Hedging currencies



## Investor82 (4 March 2010)

Dear FX gurus
I am a bit of a newb to FX - actually I have never traded FX, however have a broad understanding of it. My experiance however comes from assisting clients in my old bank days hedging the currency as they were international traders and wanted to minimise risk. The transactions I was assisting with were multiple millions/month. 

I am now in a situation which sees me earning USD, however I need to shift money back to AUD on a monthly basis (to pay for mortgages etc). When I started this job 12 months ago I was quite happy with a 0.63c exchange rate. However, now, at .90c I am effectlively earning 30% less! 

I am wanting to know if there is any way I can 'hedge' the currency to maximise my exchange rate. I earn a good income, unfortunalty though,  I dont earn millions/month so I am quite cost consious. 

Any ideas would be appreciated.


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## ROE (4 March 2010)

The way I understand it is..

Hedging is an insurance policy it protect you from an extreme negative events for a cost .... so there is some risk associated with it, it's not something you can do for free and provide maximum return.

Say you want to hedge your currency now at 90 cents for a small cost
dollar gone down to 85 cents ...you lose both way cost and 5 cents.

and the other way is it goes to 95 cents it save you a bit but it still cost you for insurance policy.


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## skyQuake (4 March 2010)

Open a CFD account and long AUD/USD. So any increases in the AUD value past say 90 now will be profits in ur cfd acct (to make up losses from ur USD earnings being worth less) and vice versa.

Just need to ensure u have sufficient margin there.

And the cost is 2 pips 

The trick is in determining how much to long.


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## Timmy (5 March 2010)

Investor82 said:


> I am wanting to know if there is any way I can 'hedge' the currency to maximise my exchange rate. I earn a good income, unfortunalty though,  I dont earn millions/month so I am quite cost consious.




You can hedge through a Forward FX contract.  

How do you cover your FX at the moment?  I guess you get paid USD then you go into a bank and exchange the USD for AUD at the prevailing rate on the day (or something along these lines, right?).  A Forward FX contract is very similar except you reach agreement *today *on the exchange rate that will apply in the future (the days you get paid).  You do the actual exchange on the future date (or dates, in your case), but you know what the FX rate will be, because you have set it today.

The actual rate that the deal will be done at in the future is figured out today using the current spot rate adjusted for what are called 'forward points', which are worked out using the interest rate difference between Australia and the US (in the case of a AUD/USD exchange, which is what you are doing).  Apart from the FX dealer's (the dealer will be the bank or other organisation you use) commission, which will usually be incorporated in the spread, although there most likely will be some other fee for you, there is no other 'cost'.  The exchange rate used will be different to the spot rate, this is not a 'cost' or a 'profit', it is a reflection of the different carry costs of holding USD or AUD.

If you know you are going to be paid $X USD on March 15, April 15, May 15 (or whatever dates) ...etc (i.e. wages) then you can arrange for forward FX contracts to be made for those dates (or the day after, or whatever).  You then exchange the USD you have received for AUD at the rate you know today, so removing the risk of AUD/USD exchange rate movements (i.e. if the AUD appreciates you will be ahead, if the AUD depreciates, you wont be ... BUT you WILL have certainty).

I will dig up some organisations that might be able to do this for you (if you are BHP then any of the banks will do this for you, but if you are dealing smaller amounts then maybe the big 4 can't help ... but there will be reputable organisations that can help).

ps. Can't see why skyQuakes' solution wouldn't work too.


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## prawn_86 (5 March 2010)

Check your PM's Investor82


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