The Vegvisir

Hedging is a means of mitigating risk that arises out of potential losses in investments by taking an opposite position in a related asset. This does not come without a come and can reduce potential profits. Hedging strategies typically employ the use of derivatives which can include options and futures contracts. The easiest way to understand hedging is by taking into example a personal asset that has high value, such as a house. To 'hedge' the risk of an unforeseen event incurring a high cost on this asset you may take out insurance; a position in a related asset. By investing in insurance you protect your own personal investment. In financial terms this is more complex and can involve the use of put options, call options and futures contracts. We will consider each of these in turn. Put options A put option is a derivative that enables its owners the right (but crucially not the obligation) to sell a specified amount of an underlying security at a specified pri...

Foreign exchange risk is the risk of losses emerging in international financial transactions due to the fluctuation of currencies. It describes the possibility that an investment's value may decrease due to changes in foreign currencies. There are three types of foreign exchange risk; let us consider each in turn: 1.) Translation risk: This is the risk when foreign operations / investments need to be translated back the base currency. this can be considered through MNCP's who have foreign operations must have their revenues translated back to the parent company's base currency. This can also effected investors; let us consider an example. For example, if an investor in the UK has a lot of cash invested in different US equities and the dividends are returned in USD. It was assumed that the difference between the USD and GBP was 1:1. If the dollar appreciates against the pound that so that it is 0.9:1 the investor will experience a 10% lower return on investment d...

What is Forex?  Forex refers to the foreign exchange market - the trading of one currency to another. These trades take place on the foreign exchange market AKA the Forex market for short. This market is the most liquid market in the world with trillions changing hands each day. There is no physical centralized location but instead is a electronic network of banks, brokers, institutions and individual traders (mostly trading through brokers or banks).  Trades on the Forex markets take place for a multitude of reasons. It can be done for profit by financial traders who may bet on a currency appreciating or depreciating in value, it can be done by a treasury to ensure its business has the right amount of a currency for the right duration of time to ensure its financial health or it could be as simple as a tourist changing currencies at an airport.  What drives decisions behind Forex?  Interest rate decisions made by central banks  Th...