Saturday, 20 July 2013

Investors Must Protect Investments From Currency Risks

investing in currency
As investors, it is important to minimize currency risks on their investments, as they can lead to a substantial loss of investment principle. It is first important to understand what currency risk is, where it originates from and what consequences can derive from them in order to protect your investments from them. Currency risk is essentially a form of risk that originates from changes in the relative valuation of currencies. Therefore, these changes can result in unpredictable gains and losses when the profits or dividends from an investment are converted from the foreign currency into U.S. dollars. In order to protect their investments, investors can reduce currency risk by using hedges and other techniques designed to offset any currency-related gains or losses.

Managing currency risk is a complicated but important part of protecting your investment principle. Investors have several options when it comes to managing currency risk, including instruments such as currency futures, forwards and options. However these instruments are often expensive and complicated to use for private investors. In addition, a simple, flexible and liquid alternative to hedging against currency investment risks are currency-focused exchange-traded funds (ETF) and income producing assets. Although there are several ways to invest in the currency market and manage your exposure to risk, it is widely considered a risky commitment and (understandably) some options are riskier than others.

It is important to remember that currency risk originates from changes in the relative valuation of currencies and as such investors should learn about the markets they are investing in, in order to protect their principle and enjoy long-term investment success. Although they can benefit your investment at the time of purchase, currency trading is an extremely risky form of investment, and is only suitable for individuals and institutions capable of handling the potential losses; that could unexpectedly result.

3 comments:

  1. Unfortunately, the risks of currency value fluctuations is something very few investors stop to consider.

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