Any high-powered investor likely already knows every subtle nuance involved with it, but for inexperienced investors, they might be asking: What is currency risk management?
Read on, and take note, because currency risk is something that must be accounted for when making investments overseas.
What Is Currency Risk Management? How Does Currency Risk Impact My Investment?
When money is converted from one currency to another, it can result in a gain or loss. This is because not all currencies are valued the same. You have to look into the conversion rate between one currency to another in order to foresee these losses or gains.
This phenomenon holds true in the world of investing. If you made an investment overseas, and that investment was placed in euros, but then the exchange rate between the euro and the United States dollar dropped, you would take a hit on your dividends. If the exchange rate drops enough, an investor could see a huge chunk of their dividends disappear.
How Can I Manage Currency Risk?
There are a variety of ways that you can downplay currency risk when investing in other countries. While we will not go into all the nitty-gritty details here, the heart of the philosophy states that investors must hedge their investments as to avoid a major, unexpected loss. In some cases, short-selling the currency is a way of hedging an investment and protects you when the exchange rate falls.
Exchange-traded funds are arguably the most simplistic way of hedging yourself from currency risk. These are offered by a number of big financial institutions and include multiple currencies from around the globe.
Accountants Are Available To Help
These are just the basics of currency risk. There is a reason why entire books have been written about investing — it is a complex process. Your best bet is to consult a qualified accounting professional that has knowledge in this area. You can locate one using TalkLocal’s convenient website.
