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How to lock in an exchange rate for your money transfer with hedging options

Save on your international money transfer or forex trade with a temporary, guaranteed rate.

Hedging options and forward contracts, especially for recurring transfers, can help you lock in a great exchange rate.

What does it mean to “hedge” your options?

The investment community uses “hedging” to describe protecting or lowering your risk of loss on a trade. There are a few tools you can use to hedge your risk in the foreign exchange and currency transfer market: forward contracts, limit orders and stop-loss orders.

Contract options

Forex transactions can be completed in two ways: by using a spot contract or using a forward contract.

Spot contracts

A spot contract is just that — a rate that a bank or money transfer service quotes on the spot at the moment of your exchange. If you’re sending a one-off transfer, you’re using a spot contract. The rate you’re offered is often a margin above the interbank or mid-market rate, marked up a bit so the provider can pocket the difference. You’ll typically get a better spot contract with an independent money transfer service than you will with a bank.

Forward contracts

Unlike a spot contract, a forward contract allows you to lock in a favorable exchange rate for future purchases, protecting you against unexpected fluctuations in exchange rates. Ideal for businesses or those making recurring transfers, these agreements usually guarantee you a rate from 30 days to up to two years. They typically require a deposit with the balance due once the contract is executed.

What is the mid-market rate?

The mid-market rate is what your money’s actually worth on the global market compared to another currency. It’s the midpoint between worldwide supply and demand for that currency — and the rate banks and transfer services use when they trade among themselves. Use this rate as a baseline to compare against the rates provided by your bank or transfer service. With it, you’ll discover which companies offer the best rates.

Order options

Exchange rates constantly fluctuate, and most foreign exchange providers offer order services that smooth out the predictability of these fluctuations. Order options are best for those who have a good handle on predictions and know when it’s a good time to buy.

Limit orders

With a limit order, you specify your ideal exchange rate. When the market reaches that rate, it’s locked in and you’re contacted to authorize the completion of your transfer.

Stop-loss orders

A stop-loss order is nearly the opposite of a limit order: instead of specifying an ideal rate, you indicate a rate you want to avoid dropping below. If the market falls to that rate, your currency is purchased automatically, giving you the potential to profit when the market rises again. Many people use limit orders and stop-loss orders together.

Recurring payments

If you need to send regular transfers overseas — weekly, monthly or quarterly payments to the same recipient — many services will allow you to lock in even better rates with lower fees.

As with any money transfer transaction, be sure to compare your options so you can get the best rates and fees for your money.

How can I hedge with an online forex broker?

To begin hedging your forex trades, you’ll need to:

  1. Determine your options. Learn whether your broker offers such hedging tools as forward contracts, limit orders and stop-loss orders or find one that does.
  2. Assess your risk tolerance. No trade carries zero risk, so you’ll need to determine how much risk you’re willing to take.
  3. Choose two currencies to trade. Consider pairing the “majors” — for example, dollars and pounds — against the euro.
  4. Contact a forex broker. If you’re a new client or will make ongoing exchanges, ask if you’re eligible for any bonuses or perks. Then get to hedging your trades.

Written by

Kelly Suzan Waggoner

Kelly Suzan Waggoner is a Personal Finance Editor at AOL and the former US editor-in-chief at Finder, where she worked with a talented team of expert writers and editors focused on helping readers to save money, earn money and grow their wealth. She joined Finder in 2016 as an editor, germinating the site from money transfers to include the wide scope of personal finance. Kelly has worked with publishers, magazines and nonprofits throughout New York City to develop best practices around editorial, SEO, plain language and accessibility, including Black Dog & Leventhal Publishers, HauteLife Press and Queerty. She is quoted on such sites as Lifehacker and CertifiKid, and ghostwrote Copyediting and Proofreading for Dummies, published by Wiley. Kelly earned a BA in English from Russell Sage College and a Poynter ACES Certificate in Editing from Poynter News University. She is trained in digital and website accessibility and plain language, and is a member of ACES: The Society for Editing and the Center for Plain Language. Between projects, she toys with words, flips through style guides and fantasizes about the serial comma’s world domination. See full profile

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2 Responses

    Default Gravatar
    U.K.August 12, 2018

    I plan to go spend some very long periods in Buenos Aires, and see the exchange rate is currently good. What are my options about forward buying or locking in right now ? And if so, how ?

      AvatarFinder
      JoshuaAugust 23, 2018Finder

      Hi U.K. resident,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      As what our guide mentioned, there are a few tools that you might want to try. These are the Contract Options (Spot Contracts and Forward Contracts) and Order Options (Limit Orders and Stop-Loss Order). Please refer to our guide to know more about these tools.

      Once you have already decided which tools to use, you can then read more about them.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

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