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So how can a business protect itself against currency volatility?

One risk manag ement tool that can help a business protect its profits from unforeseeable chang es in the currency market is hedging. The primary goal when hedging is to protec t your company's profits from exchange rate uncertainty at the lowest possible c ost. How to hedge against risk exposure Individuals and businesses can easily reduce exposure to currency risk by taking positions in the spot currency market. For example, if a US company doing busin ess with the UK wants to protect itself against a depreciating dollar, then the appropriate hedge would be to short dollars and go long pounds in the spot curre ncy market. By using a trading account, the business can customize the amount of leverage it uses, (all amounts up to 100:1*) so that even a perfect hedge is po ssible at a very low cost. *Without proper risk management, a high degree of leverage can lead to large los ses as well as gains For instance: an American importer is expecting a shipment of 380,000 pounds ste rling worth of British goods in four months. To pay his supplier, he will need t o convert dollars to pounds. Because he will not be making payment until the goods are delivered, there is a risk that the dollar may decline and make purchase more expensive. There is also a chance that it would appreciate and make the transaction cheaper, but the imp orter prefers to enter a hedge to avoid the risk of having to pay more in the fu ture. To hedge his risk, he buys 380,000 pounds in the currency market. If the pound a ppreciates (and consequently the dollar depreciates), he will profit in his trad ing account-and completely offset any losses he would have incurred by convertin g at the end of the four months. Low-cost protection Hedging can result in substantial savings. Without a hedge, a move from 1.79 to 1.93 (shown on the chart) would have meant that the importer paid $53,200 at the end of the four months! By protecting himself with a spot market trade, the imp orter made this $53,200 in his trading account and cancelled out the loss. The c ost to make the hedge? $190. Hedging in the spot market is a very effective and affordable way to protect aga inst currency volatility. Since up to 100:1 leverage* is available in a trading account, relatively little initial capitalization is needed. Trades can be made over the internet, with no commissions or fees to pay, aside from the cost of th e bid/ask spread. Learn more about how a trading account works. *Without proper risk management, this high degree of leverage can lead to large losses as well as gains. An additional source of revenue Of course, exchange rate movements can also provide opportunities to make additi onal revenues by taking positions in the currency market. The same market volati lity that makes hedging necessary when doing business can also be used to make u p for lost revenue when currency prices make your product more expensive abroad, for example