« Some More Foreign Exchange - Carry Trades | Main | Foreign Exchange Hedging Part II »

Jun 9
Foreign Exchange Hedging

Historically manufacturers used Foreign Exchange (FX) to hedge or protect their profits earned in other countries.  If I was selling wheat to the and lived in the I would worry that the value of the British Pound (GBP) might devalue before I could repatriate my profits.

Here is how I might hedge my profits.  When I sell my wheat, I become long the GBP (being long means I own GBP).  I am not going to receive my GBP for 90 days it takes to ship the wheat from Minnesota.  At the time of the sale I sell GBP forward 90 days and lock in the exchange rate for my sale.  That way, no matter what happens to the GBP/USD (known in the trade as Cable) exchange rate; I will receive the dollars I planned on when I sold the wheat.

It is possible that the GBP might appreciate against the dollar.  In that case I would have an opportunity loss, but if the GBP depreciated I would be happy.

So hedge away and protect your profits.  And go out and make some new ones.


2 Comments/Trackbacks




It would appear that the GPS has indeed appreciated recently over the US dollar. But appearances can sometimes be deceiving. Hasn't the US dollar really LOST value recently against the British pound?

It amounts to the same thing, it is two sides of the same coin. In any currency pair, if one gains in value, the other necessarily loses in value. The difference is in the cause. Are investors looking at US interest and inflation rates and seeing relative weakness, or are they looking at the UK interest and inflation rates and seeing relative strength?

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« Some More Foreign Exchange - Carry Trades | Main | Foreign Exchange Hedging Part II »

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