Currency exchange rates are extremely volatile. They fluctuate constantly based on market factors like the demand and supply of currencies exchanged. So, how do you counteract and reduce the potential losses due to exchange rate changes? That’s when currency hedging comes in! It is a strategy to manage the risks of fluctuations in FX rates. You must read this blog further to understand currency hedging and why it is important for international students planning to study abroad.
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What is Currency Hedging?
Currency hedging is a strategy used to mitigate, reduce, and neutralise the impact of currency rate fluctuations. Since currency exchange rate calculations depend on factors like political and financial stability in the country, interest rates, money supply, etc, FX rates keep on changing.
To avoid sudden increases in the currency exchange rates, currency hedging strategies are used. It lets you lock the exchange rate today, so these fluctuations don’t affect your finances much. Exchange rate hedging reduces the uncertainty of how much money you’ll need to send from home, making budgeting easier.
Examples of Currency Hedging
Currency hedging is used in everyday situations to manage foreign exchange risks. Individuals, investors, importers, exporters, and financial institutions use currency hedging to mitigate the risk of adverse fluctuations in exchange rates. Some of the common examples of understanding currency exchange rate hedging are listed below:
- Students planning to study abroad might hedge to protect their income and make the cheapest international money transfers.
- Individuals locking exchange rates for the purchase of property abroad.
- Investors buying stocks, bonds, or real estate in a foreign currency might hedge to protect their investment from currency fluctuations.
- Financial institutions like banks use currency hedging strategies to manage their exposure to foreign exchange risk and generate profits from currency movements.
- Importers use currency hedging to lock in a predictable cost for the raw materials they purchase in a foreign currency.
- Exporters can hedge to protect their profits earned in a foreign currency from weakening in their home currency.
Also Read: Travelling to London for studies? Read about Currency Exchange in London and get complete information about the same.
Currency Hedging for Students
Students in India planning to study abroad must know about currency hedging. It is an essential strategy that lets you secure your foreign education budget. Wondering how? By using an important instrument called ‘Forward Contracts’. This helps you to protect your education budget against falling/ weakening rupee to study abroad. With a Forward Contract, you can book the exchange rate for international wire transfers that will take place in future.
Think of this- you are sending money from India (in INR) to pay for your education in the US (in USD). If the value of 1 USD increases from Rs. 80 to Rs 85, leading to the rupee weakening against the dollar, you’ll end up sending more rupees to cover the same amount in dollars. By using a currency hedging strategy, you can lock in an exchange rate today, so these fluctuations don’t affect your budget as much.
Currency Hedging Process
If you are thinking about how currency hedging is done, the process involves using Forward Contracts from the banks.
- A Forward Contract is like a deal you make with your bank to lock in today’s exchange rate for future money transfers. Some of the top Indian banks offering Forward Rate Agreements (FRA) are Union Bank of India, HDFC, IDBI Bank, Kotak Mahindra Bank, etc.
- With an FRA, you are guaranteed the rate you agreed on today, even if the exchange exchange rate in the USA or any country goes up or down.
- Currency hedging gives you peace of mind knowing exactly how much you’ll pay for your transfer.
For example, To make international wire transfers, Ram and the bank agreed on a fixed exchange rate for converting INR to USD in six months at INR 80 = 1 USD. You pay a small amount of fee (as a premium) to the bank for locking in the rate. In six months, regardless of the actual exchange rate, you exchange INR for USD at a pre-agreed rate via an FRA.
Also Read: Check this blog and learn all the differences between international wire transfers and forex card transactions abroad and choose the suitable option.
Important Guidelines
One of the important things to consider when choosing currency hedging for students is to monitor exchange rates regularly. You should only send money and opt for exchange rate hedging when the rate is favourable.
- FX Hedging often comes with fees and can be expensive if not utilised correctly. Banks or financial institutions typically charge fees for setting up and managing a hedge, like a forward contract. These fees can be a fixed amount or a percentage of the transaction value.
- Currency hedging risks can be high as the process is complex. Choosing the right strategy requires research and financial knowledge, and thus should only be considered if you have a buffer in your budget to count for risks.
- Incorporating currency hedging strategies is more beneficial for large, one-time payments like tuition fees, and less so for smaller, ongoing expenses.
This was all about currency hedging for students planning to study abroad. Currency hedging can be a helpful tool for international students, but it’s not always necessary. While using these strategies lets you pre-book the exchange rates today and avoid high FX surprises later, you must compare the benefits against the costs and complexity before deciding.
To know more about education loans, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
FAQs
Currency hedging is a strategy used to mitigate, reduce, and neutralise the impact of currency rate fluctuations. It lets you lock the exchange rate today, so these fluctuations don’t affect your finances much.
A currency hedging strategy is a way to manage the risks of fluctuations in FX rates. Forward contracts are one of the instruments used to reduce the potential risks. With a forward contract, you can book the exchange rate for a transaction that will take place in future.
Currency hedging can help students planning to study abroad manage their finances efficiently. This strategy lets you secure your foreign education budget by booking the exchange rate for international transactions that will take place in future.
Currency hedging can cost you a bit. Banks or financial institutions typically charge fees for setting up and managing a hedge, like a forward contract. These fees can be a fixed amount or a percentage of the transaction value.
Currency exchange rates are hard to predict. Fluctuations in exchange rates add to currency volatility and that can be costly. To save from potential losses in business, investments, or budget planning for foreign studies, currency hedging lets you lock the exchange rate today.
