Currency Hedging

[crystalbrite]

With the US dollar going downhill at the moment, it would be wise for your business to hedge and convert certain portions of your income to Euro. What's the best ratio that you should maintain between Dollar and Euro. I know this sounds complicated but any advice is most appreciated. Thanks

[Fergal]

When you say "best ratio" are you referring to exchange rates or the amount of each currency you should hold?

If you're referring to exchange rates, these obviously change constantly in real time?

[wkhaiaun]

It's a very difficult question to answer. I think my accountant can answer better ;)
When Euro started to introduce in 1999, the equivalent amount was about 0.9 for every 1 USD. Today it has already grown to more than 1.52USD need to purchase 1 Euro. The reverse. I think what you mean here is that, what's the ratio of currency holding that you need to hold in your savings so that fluctuation in currency would have little effect on your wealth right? Is that what you are trying to ask? :confused:

[crystalbrite]

Sorry guys for the confusion. I guess I didn't specify clearly my questions here.

What I was referring to is, if let's say you have 1000USD, how would you split your currency? How much USD from that amount do you want to take out and convert to Euro.

Thanks for your help.

[Fergal]

I don't have any great expertise in foreign exchange, so my views are merely an opinion. I personally wouldn't convert dollars to Euro at this time, unless it was for a very quick short term gain. My personal opinion is that although the Dollar may go a little lower in the short term, in the longer term the Dollar will increase in value. In fact I think now might be a good time to buy Dollars, as they are so cheap.

[wormy]

Currency fluctuations are a complex beast. Without getting too technical it is somewhat accurate to say that a little jump upwards is more often than not followed by a little bump downwards. A longer scale leap downwards would consequently be followed by a longer scale rebound upwards. We have seen a large crash in the dollar's value in relation to other currencies so just based very crudely on this trend alone it is probably the wrong time to be scared of the dollar crashing down further. Either it will stay as is or get stronger.

Look how relatively predictable and stable things usually look like over the years and decades in the long term:

http://statistics.defra.gov.uk/esg/ace/images/charta5e.jpg

[wkhaiaun]

I think when it comes to this question, it's pretty hard to tell cause nobody can look ahead. I can't give you the 'right' ratio for your currency holding because there are many factors to consider which we cannot foresee such as future contracts and interest rate decisions. But generally, what I can tell you is that, you should definitely not hold all your savings in USD. The ratio you have to buy and adjust yourself depending on the market situation. Hope that helps.

[crystalbrite]

Thanks guys, somehow I get your idea though not very clear. I'll be meeting my college friends who studied finance in a few days, maybe I can get his idea as well and what he thinks. It's really a complex business.

[wormy]

crystalbrite, I am curious as to what you meant exactly when you meant hedge and convert income to Euro based assets. Were you referring to profit coming out of a business that is usually set aside in an interest bearing account? Or perhaps income taken out of a business(or even a job) and then set aside in a savings plan? If so then it may still make sense to move to Euro based assets until there is some certainty restored in the dollar economy.

I am no financial analyst by any stretch but from what I gather, there has been a large shrinkage in the "global dollar economy" over the last couple of years where China moved a lot of their forex funds from all dollars to a mixed bag of Euros, Yen, Dollars and Sterling etc. This shrinking does not mean that less goods and services are being produced but just that the preferred storage of currency has shifted from the dollar to the euro. So while the economic output of the USA has remained the same the tremendous backflow of foreign held US dollars has shrunk the "dollar zone" down a little bit. This has had the effect of flooding the US with dollars that it printed decades and decades ago so the ripple effect is aggravating the already troubled US economy a bit. So I would say that the dollar could indeed drop another 10% or 20% in value against the Euro and definately against gold(gold is rumored to go up sky high even from where it is at right now).

I think there are a number of bubbles that have yet to burst in the US economy related to overhyped derivative securities and other investment funds. The fifth largest US investment bank has just recently gone bankrupt and is being purchased for pennies on the dollar by JP Morgan. The reuter's article is here:

http://www.reuters.com/article/domesticNews/idUSN1650564120080317

Not that it relates directly to running a personal business but such a major event possibly related to an upcoming recession is quite an interesting topic nevertheless.

[rachael24]

The article in the last post has some good information, I think I understand the question. I would give that a shot, and any other questions, let us know!

[pawanjot90]

exchange rates changes everytime . Mostly at weekends they are very high.