How to secure a favourable exchange rate in an unstable market

In late July, the Australian dollar hit 110.62 US cents – a record high since the dollar was floated in 1983. But the US debt crisis and other international debt rumours have created a fearful market psyche. This saw the Aussie dollar fall 10% in one week.

Despite this drop, the Aussie dollar now remains above parity with the US dollar. And, by using effective forex risk management tools, it is possible for both businesses and individuals to lock in a favourable exchange rate for their overseas payments or transactions.

Whether you’re planning an overseas trip, making an international payment for your business or simply need to exchange your dollar, risk management tools allow you to hedge your money and protect yourself from an unstable market.

Risk management products include Forward Exchange Contracts, Limit Orders and Options, and offer a prudent way to secure and control exchange rates – as opposed to being at the whim of a volatile market.

Some of the choices available to those interested in hedging themselves against yo-yoing markets include:

Forward Exchange Contracts

Under a Forward Exchange Contract (FEC), you can lock in an exchange rate (before it falls) and pay the funds at a future date. FECs allow you to protect yourself from fluctuating exchange rates and know the exact cost of your transaction.

Limit Orders

With exchange rates rising and falling, it’s difficult to constantly monitor the market to jump on the best exchange rates. When you place a Limit Order with a forex dealer, you specify a target exchange rate that you would like to transact at. If the target rate is triggered, dealers then transact on your behalf. Limit orders allow you to ensure you get the best rates when you exchange money or make an international payment.

Options

When you buy an option, you secure the right – but not the obligation – to exchange your funds or make a transaction at a set exchange rate on a chosen date. By paying for the Option, you shield yourself from falling exchange rates, but are also not obligated to transact should the exchange rates rise favourably. This can significantly reduce the risks of transacting when the market is in flux.

A strong Aussie dollar is a blessing for online shoppers, importers and Australians travelling overseas. Despite the recent drop in the exchange rate, the dollar remains above parity, and by using these risk management tools, you can hedge yourself against the possibility of the Australian dollar dropping further.

If the gloomy economic outlook and pessimistic market commentary is making you worried about the reduced value of your dollar, be comforted that it is still possible to lock in good rates when you exchange your money for overseas trips and when making international payments.

What other risk management tools do you use when making an international payment?

Visit Yahoo!7's Currencies Converter or Forex Education Centre for more information.