If You Buy, Sell or Invest Overseas... Read This!

By Anna Johnson

Are you a hedger or a speculator?

If you buy products or services from overseas vendors... or sell your own products or services to people or companies overseas, you may be one or the other.

What am I talking about?

Well, unless you always buy and sell everything in your home currency (or in a currency that's fixed to your home currency), you're exposed to exchange rate risk.

In other words, each time you buy or sell in the currency of another country... how much you pay or receive in terms of YOUR currency will vary according to fluctuations in the exchange rate
(i.e. how much it costs in your currency to buy a dollar, or Euro, or pound, or whatever in the currency of the other country, and vice versa).

Let me explain with an example.

I live, and run my business, from Australia. But I sell my ebooks in US dollars.

I do this for marketing reasons. For one thing, I want to make it as easy as possible for my largest customer segment (Americans) to buy from me.

I don't want a certain percentage of customers being deterred from buying because of the hassle of doing an exchange rate calculation!

Equally, I know that the US dollar is recognized and accepted around the world, so although it may be less attractive than buying in their own currency, a US dollar price is less likely to deter non-Americans than say, an Australian dollar price.

And having one currency is also less messy (marketing and administration-wise) than having a myriad of different currencies to choose from!

In any case, the upshot is that whenever the Australian dollar increases in value vis-a-vis the US dollar - i.e. one Australian dollar buys more US dollars (or percentage of US dollars) then I actually receive FEWER Australian dollars when I make a sale. The reverse is also true.

I am, in fact, speculating on the US dollar.

At a certain point, if the US dollar continues it's recent downward slide, I might want to preserve a certain amount of profit so that I don't continue losing money due to an unfavorable (to me) exchange rate.

How can I do this?

One way is to sell US dollar futures. In other words, I can hedge my bet on the US dollar by selling contracts where I profit if the US dollar declines against the Australian dollar.

By doing this strategically and in proportion to my volume of sales, I can actually lock in a fixed amount of profit when I sell my US dollar priced products.

In fact, ANYONE who imports or exports in high volumes is well- advised to buy or sell futures (as the case may be) to protect against exchange rate risk.

This is especially the case where a slight change in the exchange rate can WIPE OUT a profit and send you into a loss situation.

Futures can also be used to hedge against exposure to:

- Variations in interest rates
- Variations in the prices of commodities
- Variations in the value of company shares

and variations in the price of other assets.

If you run a transport company, for example, you may want to buy oil futures. If oil prices rise, your transport costs will increase, but you'll also profit on your futures contracts...

If you grow wheat, you may want to SELL wheat futures. If wheat prices decline, you'll earn less on sales of your crop... but you'll profit on your wheat futures.

In fact, although futures and options exchanges are often discussed in the context of high-risk speculation, their original and MAIN purpose was (and is) to allow people and companies to
REDUCE their risk.

Of course, speculating provides an important role in the markets: speculators provide much needed liquidity - so there is someone to transact with when you want to buy or sell!

And yes, there are also plenty of theories about how to speculate or trade the markets to make profits.

Investment Success Formula shows you how to trade futures and options to hedge your bets. I also discuss what I believe to be the only legitimate strategy for speculating / trading to make profits.