It is very difficult to avoid the need to buy foreign currency in today's globalized and massively interconnected world. The internet, cheap flights, and greater economic interdependence have opened up the world like never before. Our everyday transactions are increasingly conducted not just in our home currencies, like Dollars, but in Euros, Sterling, or even Chinese Renminbi.

Foreign currency for work, play or to get away

The need to watch foreign currency rates has long been a preoccupation of those looking to vacate abroad. The amount of money you have to spend whilst abroad is fixed, but the exchange rates certainly aren't. As a result, the decision of where to go, and when to buy foreign currency, is very dependent on the fitful winds of the foreign exchange market.

Additionally, many of us are now purchasing gifts and other goods from overseas, a trend encouraged by the popular internet market places. If you are making regular purchases online, from non-US sources, you are again being exposed to the vagaries of the international currency market. The price of goods can become cheaper or dearer, as the Dollar strengthens and weakens. This can make it difficult to judge when it is the best time to buy.


Another aspect of our lives touched by the internet is the growth of services, and self employment opportunities, found in the global online freelance market. Often the rates of pay are stipulated in non-domestic currencies, so the amount you can earn by online work can fluctuate quite significantly.

Hedge your risk and fix your rates

So, along with all the benefits of the internationalization of the last decade, there are new levels of uncertainty. Is there anything that can be done to address this for those involved in these activities?

Well, the corporations have long had to deal with similar levels of currency risk in their international trading, and a whole host of markets have developed around them to help offset the risk. Such risk offsetting is called hedging. It involves identifying a persistent and important source of risk, and then entering a transaction that takes up an equal and opposite risk. The two then balance out.

For example, if you are looking to buy foreign currency to fund an overseas trip, your risk is that the fixed Dollars amount will buy fewer Euros, say, in six months time, when you want to travel. To eliminate this risk, you enter a transaction to buy the same amount of Dollars for fixed exchange rate against the Euro, in six months time. Any loss on your plan to buy foreign currency, IE Euros, will be offset by a gain on this hedging transaction - you have effectively fixed you rate of exchange. This sort of hedging transaction can be done readily on the newly accessible forex trading markets, provided your broker allows long term fixed contracts and provided transaction costs are low.