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Currency fluctuations: how can you protect yourself?

Daily fluctuations in exchange rates play an important role in the performance of your investments, having a direct impact on the valuation of your portfolio. When the local currency weakens against the purchasing currency, the portfolio loses value, and vice versa. Given this scenario, the question arises of how to protect your stock market investments against exchange rate risks, allowing you to continue investing without being overly affected by currency fluctuations.

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Here are some tips.

1) Market diversification

Diversification into new markets can provide companies with considerable advantages, opening doors to growth opportunities, reducing dependence on a single market, and allowing them to adapt to changing economic conditions. By exploring different regions, companies can take advantage of local competitive advantages, diversifying their products or services to meet the specific needs of each market.

2) Currency Hedging

This is the simplest and most frequently used instrument for managing exchange rate risks. By fixing in advance the exchange rate that will be used to convert the currency, hedging thus eliminates 100% of the risks associated with market fluctuations. Essentially, this strategy provides solid security by establishing, in advance, the exact value of the currency to be exchanged, ensuring predictability in transactions, and protecting the company against unfavorable variations in exchange rates.

There are three main instruments for currency hedging: currency forward, NDF (Non-Deliverable Forward), and currency options. The currency forward is similar to a standard operation, with settlement between two working days and one year, requiring documentation until settlement. The NDF is a derivative with pricing similar to the currency swap, but it does not require exchange documents and can be used for settlements of more than one year. On the other hand, currency options involve the purchase of a dollar call, giving the company the right to acquire dollars at maturity for a predefined amount.

These tools offer flexible options to protect against exchange rate fluctuations, adapting to the specific needs of each company.

3) Investing in strong currencies

Investing in strong currencies is an effective strategy for minimizing exchange rate risks. By directing investments towards assets denominated in currencies that are considered more stable, such as those with a history of monetary stability, it is possible to significantly reduce exposure to unwanted fluctuations in exchange rates. This approach offers an additional layer of financial security, since countries with a history of economic stability tend to provide a more predictable environment that is less susceptible to volatility.

At Pryor Global, we offer foreign exchange consultancy and management so that companies can make international purchases, sales, and transfers in a safe and advantageous environment. Talk to one of our experts now!

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