Finances are of great concern to almost everybody. In all stages of human life, financial knowledge will come in handy. Financial education makes it possible for people to plan their future investments, such as buying a home, paying children’s educational expenses, and even planning retirement. It is not only important to individuals; it can also make a business more profitable and a country more affluent.

There are primarily three important steps in financial education. Firstly, sound financial knowledge will ensure that people’s financial goals and family commitments will be fulfilled seamlessly. Secondly, people need to plan their personal budgets well. This can help them become aware of the money flow in their lives. Finally, they have to adopt the habit of saving money. Saving small amounts regularly will result in a large sum of money eventually.

• Financial Planning: An overview of financial planning.

• Benefits of Financial Planning: Article that explains the importance of financial planning.

• Understanding Money: A web page that provides lots of useful information about money management.

• What is Financial Literacy?: Learn more about financial literacy in this article.

• Financial Literacy Resources: List of documents that provide great tips for financial planning.

Consumer Banking

Consumer banking or retail banking is a type of banking wherein consumers transacts directly with banking institutions. Some consumer banking services include savings and checking accounts, debit cards, mortgages, credit cards, and personal loans.

• Retail Banks: General information about retail banks.

• Retail Banking Relationships: Find out why retail banking relationships are so important.

• Innovation in Retail Banking: An article that relates how banks innovate to meet changing consumer needs.

• Retail Banking in the US: Comprehensive description of the function of retail banking in the United States.

• Retail Banking Markets: A thorough explanation of the economics of bank deposits.

Consumer Protection

Consumer protection is important because it ensures that the rights of consumers will not be compromised. Consumer protection laws are established to prevent businesses from engaging in unfair trade or fraudulent activities.

• Consumer Protection: A Federal Trade Commission web page that contains extensive information on various aspects of consumer protection.

• Consumers International: An organization that is dedicated to protecting the rights of consumers throughout the world.

• Consumer Rights and Remedies: Information and resources on the rights of consumers.

• Consumer Product Safety Act: An act that was established to ensure that products are safe for consumption by the public.

• National Consumers League: An organization that promotes social and economic justice for consumers and workers.

Economics

Economics is essentially a subject that pertains to the production, distribution, and consumption of goods and services. There are several theories of management and economic systems that are applied to provide a better understanding of the demand and supply of goods and services.

• What is Economics?: A concise definition of economics.

• Economic Education: Document that reveals the importance of economic education.

• Basic Economics: An introduction to the basic concepts of economics.

• Supply and Demand: An interesting explanation of relationship between supply and demand.

• Microeconomics vs. Macroeconomics: Find out the difference between microeconomics and macroeconomics.

• Economic Indicators: A database of worldwide economic indicators and forecasts.

Home and Mortgages

A mortgage refers to a type of loan that requires the borrower to put up a property, such as a house, as collateral. A mortgage note is used to prove that a loan exists.

• Home Mortgages: Article that describes the process of getting a home mortgage.

• Making Home Affordable: Lots of information on mortgages and affordable homes

• Mortgage Fraud: A website that aims to prevent mortgage fraud.

• Reverse Mortgage: List of important things to know about reverse mortgage.

• Ginnie Mae: The official website of the Government National Mortgage Association.

Interest Rates

Interest rates are generally expressed as annual percentages. They determine the amount of money that borrowers have to pay to lenders after obtaining a loan.

• What is Interest Rate?: An article that contains basic information about interest rate.

• Understanding Interest Rates: Detailed information on all kinds of interest rates.

Loans and Credit

A loan is essentially a kind of credit or debt instrument. It necessitates a redistribution of financial assets between the borrower and the lender. A borrower can get credit or cash advance from financial institutions with the use of a small plastic card called a credit card.

• Loan Basics: Several articles that explains a number of basic concepts of loans.

• Understanding Credit: An overview of credit and credit management.

• Credit Card Pros and Cons: Discussion about the advantages and disadvantages of credit cards.

The Federal Reserve

The United States central banking system is called the Federal Reserve. It was created as a response to a major financial crisis that occurred in the US in 1907.

• Federal Reserve Defined: A comprehensive definition of the Federal Reserve.

• Importance of Federal Reserve: Article that discusses the various functions of the Federal Reserve.

• Federal Reserve: The official website of the US Federal Reserve.

• Federal Reserve Resources: Extensive list of websites with articles, maps, speeches, testimonies, and other documents that are related to the Federal Reserve.

General Information

For more information about financial education, please visit the following sites:

• Money Smart: A financial education program that is offered by Federal Deposit Insurance Corporation.

• Financial Literacy Resources: An excellent guide to financial literacy.

• Education Finance Council: The financial literacy homepage of the Education Finance Council.

• Financial Education Database: Website of the National Financial Education Network Database.

• Financial Education Links: Links to a wide range of information about financial education.

Becoming your own boss and working from home seems like a long stretch for some people, but the concept is not as difficult as it may seem. There are many scams on the internet, making it hard to weed through the legitimate opportunities. Online marketing is one of the most popular home-based businesses; you may become an affiliate of a company that sells goods or services, you will need to sell in order to make a commission. The more traffic you generate, the more sales you will earn. An affiliate program might work well for a person that has a preexisting business and is looking to expand their range of products or services through an affiliate program that has a presence on their field.

Another profitable home-based business is being a representative for various companies, including Avon, Tupperware, Mary Kay Cosmetics, Pampered Chef and the list goes on. These types of home businesses typically require a small investment and offer a commission on items sold. Online freelance careers are another online job that can develop into a moneymaking home business. This can include freelance writing, web design, graphic design or programming.

• U.S. Small Business Administration: Use the SBA assessment tool to determine your readiness for starting a small business.
• Home-Based Business: Find information on choosing a business, spotting scams, searching for financing and the advantages and disadvantages.
• Initial Assessment for Start-up Businesses: A form to help focus and assess the basics and vision of your start-up business.
• Small Business Management Topics: Find information and planning guides on numerous small business topics.
• How to Set Up a Home-Based Business: Here you will find the steps needed to start and operate a small company with reduced start-up costs.
• The Business Plan for Home-Based Business: Interactive information and check-guide used for entrepreneurs interested in starting a home business.
• Zoning Laws for Home Based Businesses: Learn the rules of business zones and if your business location is breaking any of these guidelines.
• Marketing a Home-Based Business: Here you will find the steps that are essential for business marketing and traffic gathering.
• Small Business Self-Employed Tax Center: Small business forms, publications, news, EINs and educational resources.
• Self-Employed Electronic Fact Sheet: Learn about paying taxes as a self-employed business owner and how to report your earnings.
• Work-at-Home Schemes: List of common work at home business schemes that can cost you hundreds in lost cash.
• Pros and Cons of a Home Business: This small business series introduces the various pros and cons of starting a home business.
• Business Frequently Asked Questions: Find information on purchasing a business, licenses needed, financial help and other considerations.
• Sharpening Your Skills: Business related questions are answered and information is given on how to improve your business skills.
• Starting a Home-Based Food Business: Find the steps needed to start a home-based food business.
• Home Office Deductions: Learn what you need to know about home office deductions for your small business.
• Home Based Businesses: How to begin and be successful with your home business.
• Avoiding Common Start-Up Mistakes: Here you will find the most common start-up mistakes to avoid.
• U.S. Department of State: Frequently asked questions related to business markets and support.
• Home Business Insurance: Information about home business insurance to protect your business and investment.

The best part of developing a home business is that it is created from your own two hands and therefore can introduce personal ideas. The secret to success is to being consistent and develop a plan before draining your time and money.

The euro was introduced as an accounting currency on January 1, 1999 in correspondence with the Maastricht Treaty. Used by the European Union (EU), the euro zone includes France, Austria, Greece, Luxembourg, Netherlands, Belgium, Finland, Cyprus, Germany, Ireland, Malta, Italy, Portugal, Slovenia, Slovakia and Spain. The currency is also used in five other European countries creating a total of over 330 million euro using Europeans. The euro is the second highly traded currency following the United States and the second biggest reserve currency.

• European Commission: Description and basic information on euro coins and banknotes from the Commission of Economic and Financial Affairs.
• Official European Union Web Site: General information, institutes and bodies, policies and history of the EU.
• European Central Bank: Here you will learn about the history, monetary policy, financial stability, banknotes and educational information.

Each euro is worth one hundred cents, commonly known as euro-cents, and has a common side and a national side. On the common side of the coin, the value is engraved as well as a map that can be seen in the background. Besides the one, two and five cent euro coins, each map contains the “15 Member States” which recognize the members involved when the euro was introduced. In 2007, this map was replaced with a map of Europe which includes new outside countries, such as Norway with an exception of the one, two and five cent coins. The national side of the euro contains an image which is chosen by the country that issued that particular coin. Euro coins are issued in €2, €1, 50c, 20c, 10c, 5c, 2c and 1c in value while notes are issued in €500, €200, €100, €50, €20, €10 and €5. Each euro banknote bears the signature of the President of the European Central Bank and has its own color. The front side of the banknote features gateways while the back side has a bridge design, both created by Austrian illustrator, Robert Kalina.

• Origin of the Euro: Find answers to all your basic euro questions, such as how does this new currency work, which countries have joined and what does the currency look like.
• How to Identify Euro Coins: Look at images of each of the euro coin to properly identify each side of the eight denominations.

The framework for the establishment of the European monetary union began in the late 1980’s but wasn’t accepted until 1991 with the signed Maastricht Treaty. The idea was to create the currency through three main stages. Stage one started on July 1 of 1990 with the free movement of capital and the convergence criteria assignment. Stage two began on January 1, 1994 and included the establishment of the European Monetary Institute (EMI), national bank independent, and the stop of financing using monetary instruments in budget deficit. Stage three concluded the requirements on January 1, 1999 and resulted in one single currency and one common bank, the European Central Bank (ECB). There are several benefits to the development of the euro. There are no longer fees involved in changing currencies to firms and tourists who trade in the euro zone. It’s also easier to compare the price of good within European countries which enables firms to sell cheaper raw materials and consumers purchase cheaper goods. The ECB is committed to keep inflation low and inward investment may increase as firms use lower transaction costs in the EU.

• HM Treasury: Here you will find information on the euro and the sixteen Member States of the European Union.
• Europe’s New Currency: An overview of the Pacific Exchange Rate Service and a time table of events.

The euro was adopted in 1999 as a single currency to stabilize and strengthen the economy. Many goals of the euro have been reached, improving economic growth across Europe and integration among financial markets.

• The Euro Currency System: The European Union timeline and the future in store for the euro and euro-using countries.
• Benefits of the Euro: Read through the top eight benefits of the euro and how it affects business and consumer costs.
• Studies of the European Union: Learn about the benefits and costs of the euro, evaluation of the draft constitution and analysis of the economic policies.

Food, clothing, toys, the roof over your head, even the schoolbooks you use all cost money! To afford these items, adults work to pay for them. One day, you will also have to choose a career to provide for the items you want and need. A career is not just about earning money however, it allows you to actively participate in issues that interest you. Do you love working with animals? Than a career as a veterinarian would be a perfect match. Do you feel at home outdoors? Exploring opportunities to work with nature might be the ideal fit. Do you love to talk and interact with people? There are thousands of careers that need individuals to do just that!

Working with Animals

• Scientists in Action!: Career information related to the natural sciences covers everything from extinct dinosaurs to protecting wildlife.
• Dream Jobs: See how fun and exciting working with the National Parks Service can be!
• Veterinarian Careers: Check out this video to learn more about what veterinarians do and the types of animals they treat.
• Working at a Zoo or Animal Park: find information about careers working with animals and what it takes to be a zoo keeper.

Working Outdoors

• A Day in the Life of a Geologist: Geologist are scientists that study the Earth. They look at the materials that make up the Earth, the animals that inhabit the planet and even explore natural processes such as earthquakes and volcanoes! Most geologists will spend at least part of their time doing fieldwork.
• Careers in Earth Science: Interested in becoming a forest ranger, meteorologist or oceanographer? Learn more about the abilities and skills needed to advance in earth science fields with the National Aeronautics and Space Administration!
• Environmental Education for Kids: Here you can read up on what it takes to become a park naturalist or a forester.
• Nature Career Opportunities: Are you looking for a job that celebrates nature? Then a career as a zookeeper or a landscape architect may be the perfect fit.
• Want to be a Scientist?: This site explores various science related careers including engineering, a field that focuses on building and improving structures and machines.

Working with People

• Careers in Health and Science: Get the inside scoop on being a lung doctor, or a growth biologist.
• FBI Jobs: The Federal Bureau of Investigation has a lot of fun and rewarding careers to explore. Besides field agent positions, those who work on computers, can speak foreign languages, or can fly a plane are wanted!
• FEMA Careers for Kids: Kids interested in helping individuals struck by disasters may be interested in working for the Federal Emergency Management Agency (FEMA). Get started by reviewing the various skills and educational requirements needed to work for FEMA.
• Inside the Courtroom: Look at what it’s like to be a judge or a federal prosecutor and go inside the courtroom.
• Career Clusters: Choose from a variety of different career categories and find the career that is right for you!
• The Fun Works: Careers in medicine and law have the power to change lives! Lean about the skills valued for a career as a nurse, doctor, patent lawyer or dietitian.

The careers discussed here are just the beginning. To find the right career for you, consider the school subjects that interest you most, your hobbies, skills and your personality. With hard work and passion, your dream job will be within reach!

Money can be a tricky topic and therefore, teaching the younger generation money management and personal finance skills is of utmost importance. Unfortunately, not many parents spend time teaching young kids and even, college-going children the importance of budgeting, investing, saving and smart spending. Financial experts recommend teaching kids, aged 5 onwards, about money and personal finance. According to the 2004 Jump$tart Coalition for Personal Financial Literacy Study, 58.3 percent of financial knowledge and skills are learned at home, nearly 78 percent of high school students have a savings and/or checking account and 22.1 percent of students without any bank account scored lower than those who have a savings and/or checking account. The results clearly showed that while children are actively dealing with money they don’t really have sound money management skills and know-how. In fact, a study by Ronald P. Volpe, Haiyang Chen and Joseph J. Pavlicko states, “A literature review has shown repeatedly that high school students have not received adequate financial knowledge and have poor knowledge of finance (Bakken, 1967;CFA/AMEX, 1991;HSR, 1993;Langrehr,1979; and NAEP, 1979)” The situation doesn’t seem to have changed. According to a more recent financial literacy study conducted by Jump$tart in 2008, high school seniors correctly answered just 48 percent of the 31 multiple choice questions.

Facts and figures such as these emphasize the need and importance of explaining financial concepts to children and helping them pick the right financial tools to lead an empowered life. and Children aged 5 onwards regularly get allowances and can easily learn the importance of saving and spending wisely. Younger kids can be taught how to count money and manage allowance while tweens and teens will benefit from learning how to manage debt and invest wisely. Educating children about personal finance will go a long way in reducing debts and foreclosures and improving the overall quality of life.

Parents and teachers can make money management, personal finance and investment an interesting part of a child’s life. Not only will kids be money-savvy, they will also be in a position to make better decisions and lead a more empowered life. Parents can lead the way by setting a good example, discussing money matters with kids using easy-to-understand terms and language and by teaching them to save and invest while spending wisely.

Use the resources below to teach kids, 5 years and up, everything related to money and personal finance. Right from how to start saving from one’s allowance to investing in stocks and bonds to college loans and credit cards to planning for retirement, parents and teachers can find all the information they need to educate children about personal finance.

Financial Lessons for Kids 5-12

• Teaching Kids About Handling Money: Simple tips and ideas on how to teach basic money management skills to children of different ages.
• Money and Kids: A comprehensive article with tips on teaching toddlers, preschoolers, tweens and teens about allowance management, saving, banking and credit cards.
• Allowance Basics: Here kids can understand the basics of earning an allowance.
• Teaching the Value of Money: An easy-to-understand article with 18 tips on teaching kids the value of money right from the start.
• All About Allowances and Managing Them: A comprehensive resource for parents on allowances for kids, how to fix them and how to encourage kids to save. Also includes a quiz for parents on financial skills and knowledge.
• Kids Bank: A fun an interactive site for kids to learn about banking and money.
  
• Explaining Social Security: Stories that illustrate the role Social Security plays in one’s life.
• How to Create a Budget: Simple tips and ideas that explain how to create a spending plan and stick to it.

Financial Lessons for Teens 13-18

• Introduction to Financial Concepts: A comprehensive article on saving, investing and banking. Includes easy-to-understand information on compound interest, investing in stocks, bonds, mutual funds as well as the advantages and disadvantages of investing in each.
• Money Making Ideas for Kids: A list of jobs kids can do. Includes information on age requirements, earnings, tips on getting started and tips for success.
• Budgeting for Teens: A detailed article on how to get teens involved in the family budget as well as plan their own spending.
• Personal Finance for Teens: An interactive resource to help teens understand earning, budgeting, credit, savings, investing and risk management.
• Business for Teens: The complete small business resource for planning, establishing and succeeding in business as a teenager.
• How to Balance a Checkbook: A step-by-step guide to balancing checkbooks.
• Credit Cards and Teenagers: Tips on how to help a teen stay out of credit trouble and use a credit card wisely.
• Different Types of Financial Institutions: Information on the different types of bank and non-bank financial institutions.
• Tracking Your Checking Account: The mint offers a great page teaching teens to balance their checking account.
  

Financial Lessons for College Students

• Money Management Tips for College Students: A list of links on dog training for all ages and types. Including problem behaviors and some common issues/concerns.
• Federal Student Aid Programs: Description of the U.S. Department of Education student aid program with links to individual programs, tools to calculate eligibility, apply for student aid and other helpful resources.
• An Introduction to Credit Cards: A detailed article on credit cards, types of cards, how they work and how to best use them to establish good credit history.
• What is 401 (K): Brief overview of the 401(k) and how it works.
• Everything about the 401 (k): A comprehensive guide to the 401 (k) plans, types and requirements.
• Ways to Plan for Retirement: Offers ten ways to plan for retirement and includes easy-to-understand explanation of terms as well as helpful facts.
• Stocks, Bonds and Mutual Funds: An in-depth explanation of the different investment choices available and how to choose between them.
• Everything About Credit: A comprehensive article on understanding credit, the fine print on credit cards, keeping a clean credit record and protecting identity.
• Understanding Retirement Plans: Understanding the different types of retirement plans and how to choose the right one.
• Glossary of College and Financial Aid Terms: A complete glossary of important college and financial aid terminology and acronyms.

Financial Activities and Lesson Plans for Teachers

• Deposit Insurance and Change for a Dollar Lesson Plans: Lesson plans to help teachers teach concepts of deposit insurance and change for a dollar.
• All About Coins: A comprehensive resource with images of coins that lead to plans, activities and printables related to all the various coins, right from the penny to the Presidential Dollar.
• Federal Reserve Lesson Plans: Lesson plans for teachers to teach everything related to banking, history of money and economics.
• The Money Game: A fun card game to help children understand currency features in an interesting way.
• Lessons on Money and Personal Finance: A four-lesson curriculum with 86 pages filled with lesson plans and activity pages designed to teach middle school math classes using personal finance examples.
• Curriculum on Cards and Personal Finance: A complete unit with five lesson plans designed to teach children about three important areas of personal finance – credit cards, buying a car and debit cards.
• Fun Activities to Encourage Saving: Tips and ideas on how to encourage the habit of saving in young kids. Includes activities, such as making a Cash Kids bank.
• Lesson Plan to Teach Short-Term Savings: An activity-based lesson plan to teach kids in grades 3,4 and 5 about short-term savings goals
• Personal Finance Lesson Plans: A set of lesson plans for grades 1-5 to teach kids about personal finance in a fun and interesting way. Each grade level has 10 lesson plans covering a range of topics from bartering to shopping to starting a business.
• Money Management Projects: A set of five, long-term projects to teach kids in grades 4-6 about pricing, earnings, savings and develop mathematics and research skills as well.
• Banking for Kids: A fun and interactive website for parents and kids. Offers plenty of games and stories to learn about banking, interest rates, credit and savings.
• Building Wealth: Lesson plans on everything related to teaching personal finance to kids in high school. Includes topics such as interest, borrowing, lending, credit worthiness and entrepreneurship.

When traveling out of the country one of the most important factors for many people after reserving the hotel, tours, and air travel arrangements is how to pay for goods and services once in the foreign country. Recently the choices available to accomplish this task has expanded rapidly.

Travelers can use credit cards, ATM cards, cash, debit cards, currency cards, foreign bank accounts or traveler’s checks (although these are now less common). In the following article we will give you a step by step explanation of the pros and cons of each payment method, how to check current rates and rate trends, how to minimize fees and commissions, exchange methods to avoid, and other helpful tips.

First Things First: Find Out Current Exchange Rates

This is the traveler’s first step in the process. One must find out the current interbank exchange rate (free of fees and commissions) between your home currency and the foreign currency before shopping around for the best deal. These are just 3 out of many good sites to use to accomplish this.

XE.com – One of the leading currency exchange sites on the web. The site offers a quick chart of the most common currency pairings with current rates, historical rates, and a chart feature to help see any historical trends. This site does try to tie in purely objective information with commercial advertisements and services so be careful where you click!

Yahoo! Finance Currency – A new section added to one of the premier finance web sites on the web. This section has user friendly features such as quick currency converter guides (with several common denomination calculations done in table form), charts, and converters.

Exchange-Rates – A site devoted to exchange rates and basic exchange information.

Any of these sites will do the trick. The single most important aspect to look for is simply what the current exchange rate is between your home currency and the foreign currency.

Especially for less familiar currencies it is also important to make sure you are interpreting the conversion correctly, and not reversing the quotes. For instance if it is quoted USD/EUR @ 1.4, this means for every 1 Euro you would get 1.4 US Dollars. And for every 1 USD you would get .714 Euros (the inverse of the exchange rate). Most people know the overall relationships of the most popular currencies but if you are traveling through multiple foreign countries and need to change from one foreign currency to another, this can get confusing.

After you determined the current exchange rate, one could look at a chart to see if there is any trend in place.

For instance take this chart I pulled for the USD/EUR relationship over the past 2 years from Yahoo! Finance:

One can clearly see the trend since March of 2009 of a weakening of the US Dollar through that period. This is evidenced by the Euro buying 1.25 Dollars in March, while currently (October 2009) 1.45 Dollars are needed to buy 1 Euro.

What do trends mean? Not too much. The average traveler shouldn’t really worry about this unless he or she has a STRONG feeling of a further weakening of their home currency before they actually travel. Then it could make sense to exchange currencies as soon as possible to avoid a further weakening of the buying power. For instance in the example above if a traveler was leaving for France in July but exchanged currencies in March they would have an extra 86 Euros for every $1,000 USD exchanged.

If you are planning to exchange a large amount of money (more than $2,500-$5,000 USD or so) it could be worth staggering your exchanges. This helps minimize the risk of loosing if your home currency were to weaken substantially (as in the above example). It employs the same concept as dollar cost averaging in stock investing.

Now that you have a good idea of what the rates are currently, how to interpret them, and where they have been, time to do some exchanging!

What Form or Payment Method is Best To Use?

Usually using an ATM or a credit card are your best bets for getting the cheapest rates. In fact either one of these methods should give you the same rate you researched earlier. There is normally no mark up or commission derived from within the rate.

However, using either the ATM or credit card will entail fees and possibly several of them. Credit cards do not charge an “enhanced exchanged rate” meaning the exchange rate quoted should be the interbank rate, however if you make a purchase in a foreign currency they will charge either a flat fee or a flat percentage of the purchase.

There really is no way to avoid this fee with most credit cards. Capital One however does offer a credit card with no currency conversion or transaction fees. If you travel often it might make sense to get a Capital One credit card even if it turns out to be nothing more than a travel credit card. As an aside (for high credit score customers) the company does offer one of the best cash back deals currently available (1% or 3% depending on the purchase; foreign or domestic).

ATMs will usually charge 2 fees. Usually your home back will charge a fee for the transaction and the foreign bank/institution will also charge a fee every time you make a withdrawal. Therefore it makes sense to make as few transactions as possible and take larger amounts of money each time (if you feel safe doing so).

Both the credit card and ATM card methods will usually save you 4-6% in total versus other methods.

Direct exchanges of home currency cash in the foreign country at airport, tourist areas, and the like should be avoided. Usually there is no “fee” per se, however in its place the exchange rate is reworked to build a commission within the rate for the establishment. These kiosks or stores offer the worst deals, so they are to be avoided. It is a much better idea to visit a bank in your home country first to at least give you a small amount of foreign cash to get through the airport and to your destination.

Traveler’s checks also are usually not a great alternative. It is becoming an antiquated form of payment and the final cost is also fairly high. The main advantage of these is security. If you lose a travelers’ check it can usually be replaced at little cost to you. However for this convenience they are more expensive.

A more recent variation on this theme is the travelers check card and Travelex. This is a better alterative to a traditional check, but still is among the most expensive methods. Exchange rates in and of themselves could be close to the same levels one would get with ATMs or credit cards, but there are more fees attached and they tend to be somewhat higher. Activation, recharge, and replacement fees are a few examples.

If you are traveling for an extended period of time or will need a large amount of money it could be worth the effort of opening a bank account at a foreign institution in their currency. This would minimize fees but it does create tax reporting issues for both the United States and the foreign country. This would not make sense for 95% of travelers, but if you see yourself visiting this country often in the future and want a permanent cash presence in that currency this could worthwhile.

Getting The Best Rate For Your Exchange

Regardless of which method you choose, the best way to get the best rate is to shop around (big surprise). Usually you should work with a bank that you have the bulk of your accounts with. Bigger banks are a great resource if you belong to one of them, as they should be able to help you exchange funds directly.

As stated before if you will be using credit cards your cheapest choice is Capital One, as they charge the straight favorable intebank rate on exchanges and do not charge any fees. This is a great deal!

As far as travelers checks and check cards make sure you get a fair comparison including all fees. Ask what fees come with the checks/cards including activation, recharging the card, use fees, transaction fees, etc.

Also of note, some countries like The Bahamas, Belize, and Bermuda have their currency pegged directly to the dollar. So there is no need to convert from the USD to their currency as it is worth the same. This would mean no exchange costs and no transaction fees to worry about.

If you take your time and follow these tips the exchange from your home currency to the foreign currency should prove stress free and relatively cheap. Also depending on the amount of funds you are converting you can minimize your risk of being subject to wild currency swings especially during these volatile times.

For years people have been told to use debit and credit cards while traveling abroad as the exchange rates are typically better than you would get with travelers checks or cash.

At one time this was true, and although the exchange rates may still be favorable, banks began getting the clever idea to levy fee upon fee for those wishing to take advantage of this convenience. I suppose they need to get bailed out from somewhere, but don’t let it be your problem.

Enter the Pre-Paid Currency Card

Now, one of the newest items on the market of handy items for travelers is the prepaid currency card, and it is used just like the debit card you probably have in your wallet, but is pre-loaded with foreign currency and won’t incur as many fees.

It works just like a typical prepaid card. You load it with money and off you go, only this time you get to load it with money you can spend overseas. So now when you see that leather bag in a Paris shop window, and cannot possibly live without it, you will feel secure in the knowledge that if there is no money left on the card you can’t be overwhelmed by the heat of the moment.

In a word, it allows travelers to set personal spending limits without having the nasty surprise of a page or two’s worth of charges or usage and over-the-limit fees tacked on their banking statement. Everyone knows the fear of coming home from a wonderful trip abroad and finding the dreaded credit card or bank statement in the mail. It can turn your dream holiday quite quickly into your financial nightmare.

Advantages & Disadvantages of Pre-paid Currency Cards

There are many advantages to traveling with a prepaid spending card, some of which combine the ease of using a debit-type card and the security of knowing you won’t be able to spend more than you had planned for. However, there are also disadvantages.

Currency Card are not fee-free. They have to make their money somehow, but the fees are not anywhere near as steep as most credit card companies. However, one should always compare different companies before buying, as some are attempting to place levies on items such as top ups, ATM withdrawals, and even foreign currency exchange itself. Steer clear of those at all costs; however, if you belong to the segment of the population that doesn’t already have a debit and or credit card and cannot qualify for one they are still an option for you over traveler’s checks.

Where You’ll Find Currency Cards

In Europe there are more than a dozen providers of prepaid currency cards, but in the United States it is still relatively unknown. The preeminent dealer in the U.S. is Travelex; a name well associated with foreign exchange.

Currency cards have not been around very long, and are just beginning to achieve recognition in Europe. The cards are gaining ground with travelers going between Britain and the European continent and even those coming to the U.S, but have a long way to go to catch the eye of American travelers.

They can be bought and topped-up online in many cases, and as they grow in usage and acceptance, should have the ability to top-up in places like convenience stores. For the meantime though, unless they become more well known in the U.S. they may not gain traction amongst a credit happy populace.

Who Should Be Using Currency Cards

The prepaid currency card is especially suitable for young people traveling alone as it adds a sense of comfort for parents knowing that their child will never be caught in a foreign country without funds. No more frantic calls in the night from wayward children stranded abroad without money. Young students often do not have credit cards, and although they could use their ATM card, more and more banks are joining the fray of charging exorbitant rates on their usage in foreign countries. Parents can rest assured that funds can be added from anywhere by the click of a button.

The cards are also good for companies sending personnel overseas that may not have a company or even personal credit cards at their disposal. As the global financial crisis affects more and more people, credit is no longer as easy to come by for many so this provides a good alternative to the traditional corporate cash advance.

Increasingly, companies are looking at ways to not only save money, but to find alternatives to expensive and cumbersome expense reporting practices currently in place. The prepaid card allows companies to send their staff off on business trips with exactly the amount of currency they will need or is allotted. While this is beneficial to the company it is also beneficial to the employee. There is no chance of going over the spending limit and no excess, non-reimbursable finance charges for the employee to complain about.

Advanced Usage of Currency Cards

One of the best benefits to using a prepaid card is the opportunity to lock in and hedge exchange rates. If the card is loaded while your home currency is at a favorable rate, and not used until it drops against the currency of the country you are going to, then you will end up with extra money in your pocket. While this may not make that much difference to the casual user, it could be a tremendous benefit to business users.

The cards can be used anywhere Visa and MasterCard are accepted, and in Europe and the United States that is just about everywhere, including every fast food joint in every little hamlet. The cardinal rule with credit cards is never to withdraw money on them from an ATM, and the same is somewhat true of the prepaid card as well.

It is far better to use the card directly at an establishment as it is just like cash and you will not incur extra fees in most cases. Speaking of fees, one of the downsides is that some companies will charge sign up and monthly sums for having the card in your pocket. If you choose one of the cards that do this, you may be defeating the purpose of having a prepaid card altogether. Again, not all do, so shopping around is essential.

Available Currency

Although the most common currencies available on the cards are the British pound, the Euro, and the U.S. dollar, some companies do offer a more global card. The guess is that as it grows in acceptance, more currencies will become available on all cards. Unless they do, again this will be a downside to having them in your travel wallet.

Whether or not the prepaid cards ever gain any traction with the U.S. tourist market remains to be seen, but they should be popular in the business world. The best applications are most definitely for businesses and young travelers, which may or may not keep the trend going.

An Introduction to Physical Currency Exchange and Forex

Physical Currency Exchange vs. Currency Trading

There are different ways one can make money trading currency. The value of different currencies never remains static against the US Dollar. Physical currency exchange refers to exchanging your local currency, such as the Dollar, to the currency of another country and physically owning the foreign currency. Foreign currency exchange, or forex, on the other hand, involves trading the value of one currency for another and profiting on the fluxuations in price for the varying currencies, without owning the currency physically.

1. Physical Currency Exchange: You Own the Money

You can buy physical foreign currency when the currency of another country is going to appreciate in value against the dollar, you are relocating abroad, or simply going on vacation. You can purchase foreign currency from major banks as well as from currency dealers.

Most banks do not have foreign currency on hand. For instance, at Bank of America, you can buy the foreign currency online and have it sent directly to your house or to a bank center near you.

Currency dealers are companies that specialize specifically in providing foreign currency, and the physical locations have the currency on hand. When purchasing more than $500 worth of foreign currency, it is advised to purchase the currency online. They range from well-known companies such as AAA, to other sites you can find online.

2. Physically Owning Foreign Currency as an Investment

Investing your money abroad can be a sound way to make money. You can purchase foreign CDs, bonds, or put your money into foreign bank accounts in order to gain favorable interest. These options are often less risky than forex.

3. Forex Requires a Broker

Foreign currency exchange is done through a broker, or currency dealer. You cannot trade forex without the help of a broker. Going through a broker is different from buying currency through domestic banks or currency dealers, or when investing in foreign assets abroad.

4. Forex has no Physical Location

Forex refers to the simultaneous buying of one and selling of other currencies, referred to as a currency pair. Rather than physically owning the money, you exchange the values of the currencies online through a forex broker, which is done electronically. You open an account with the broker and use leverage to trade on margin. Forex is not performed at any physical location nor is there a centralized location, such as a stock exchange.

5. Forex is Riskier

Because you are trading currency on margin with forex, there are certain risks you take. Because you trade more money in currency than you really have, you can lose your investment quickly if you are not careful. On the other hand, those sorts of risks are not as acute when you buy physical currency, because the other currency with never lose all of its value.

How to Choose a Physical Exchange Provider

There are different things to consider when choosing a physical exchange provider.

1. How much are you willing to exchange and over how much time?

Exchange Tips For example, are you looking to make weekly transactions or just one lump sum? Travelers are often hesitant in taking large sums of cash when traveling, but do not want to deal with exchanging money when they get to their location or deal with changing exchange rates. Exchanging your money domestically if often more expensive than when you are in the foreign country, where you can get cash from ATMs and your hotel.

2. Commissions

Be wary of  “No Commissions”. If you decide to exchange some currency before you travel, and decide not to deal with banks, make sure to research exchange commissions. Rates very, and range from minimum charges, flat fees, to handling fees. Even though some companies claim they are “commission free” they make up for it by giving you a worse exchange rate.

3. Mark-ups in the Exchange Rate

Banks offer Better Rates Different physical currency exchangers, banks or other companies, offer different exchange rates. Banks usually offer not only similar exchange rates but also those that are better than exchange companies offer. Also, you can experience mark ups in the exchange rate when you use your credit card abroad, some banks charging 1-3% fees. Make sure to see what charges your bank or credit card company apply.

4. When to Exchange

When to Exchange The best way to know when to exchange is to do the research and planning well before you take your trip so you can follow the exchange rates and pick the best time to convert your money. In addition, in many countries they accept Dollars as readily as their own local currencies, especially in the Caribbean, and peg their own currencies to the dollar. It might be better to pay in dollars than spending money on exchange fees.

How to Choose a Forex Broker that is Right for You

It might seem more than a little overwhelming when trying to select the right broker when venturing into the foreign exchange currency market. Because you are likely, and it is desirable, to create a long-term trading relationship with your broker, here are some helpful tips and things to keep in mind when you begin your search:

1. Reputation

• Online Broker Reviews and Ratings
• Forex Reviews

A good place to start your search is stopping at online forex forums to see what other traders are saying about various brokers. A simple search engine query will give you many forums to choose. Reputation and trader satisfaction are likely good indicators of a sound broker. In addition, it doesn’t hurt to join email groups, mailing lists, and making contacts with others in the forum community. This way you can get referrals to a broker that’s right for you.

2. Experience

In addition to good word of mouth publicity, experience is a key. In addition to references and buzz from forums, experience, track record of success, speed of trading, and the amounts of advice given are important considerations.

3. Demo Account

You will likely want to start out with a practice, or demo, account, so make sure the potential broker offers an easy to use demo program that mimics their live software. A demo account allows you to make virtual trades with imaginary money to help you learn the ropes of trading before you ever risk money of your own.

4. Accessibility of Broker

Customer Service Make sure your broker is accessible to you via email and by phone. With the new internet age, proximity of location is less important than in the past, but make sure your potential broker can be easily reached for customer support. Are there other brokers around if yours is temporarily unavailable? Is the customer service friendly and approachable?

5. Leverage Desired

Consider what sort of leverage you desire when considering brokers. Leverage refers to ways investors utilize debt to increase profits on their investments, and in forex, it specifically refers to the ways brokers loan you money to invest on margin, to use the fluctuations in currency exchange rates between two different countries to enhance profits.

6. Trading on Margin

Margin Explained Specifically, trading on margin implies that you do not have to put up the full amount of money when investing. Margin refers to your deposit, and leverage the ratio of your investment. Once you open a margin account, standard brokers will offer you 50:1, 100:1, or 200:1, all depending on the risk you are willing to take and the size of the broker.

This means when if you want to trade $100,000 of currency on 100:1, or 1%, margin, you the investor need to deposit $1000 into the account. Because currency rates fluctuate only about 1% or so during intraday trading, it is not as risky of an investment as you think, but one should still take care. Leverage amplifies your losses as it does your earnings. A good broker will help you to limit losses.

Check to see whether the margin requirement changes for different currency pairs or on different days of the week.

7. Starting Capital

As stated above, connected with leverage is starting capital, or your margin. For a novice trader, many brokers offer “mini” forex accounts that require an initial $1000 deposit or under, or a standard account for about $2000. Many new traders, however, fail because they are undercapitalized. For a standard account, one should have $100,000 in starting capital, $10,000 for a mini account, and $1000 for a micro account. Compare what sort of accounts different brokers offer.

8. Transaction Costs and Trades per Day

How many trades can you make in one day? This depends a lot on how much money you have in your margin account and the amount of leverage you are using. Leverage is connected to your transaction costs, the price you pay to make trades. Be careful when considering high leverage trades, because even though you only need a fraction of the money down, the transaction price as a percentage of your account increases. Make sure to consider carefully the fees of different brokers.

9. Trading Hours

Forex trading hours are unique in trading markets in that they run from 5 pm EST on Sunday through 4 pm EST on Friday. The best times to trade are when the markets in London and the United States overlap, a five our window between 11:00 and 16:00 GMT, which is between 7 am and noon EST, when most trades are made. Is your broker readily available during this important trading window?

10. Regulations and Registration

It is important to keep in mind that while the forex market is unregulated, brokers themselves are. If you live in the US, make sure the broker is registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CTC) and a member of the National Futures Association. The National Futures Association’s website can verify a broker’s status with the association. In addition, it is very important you make sure clients are insured against fraud and broker bankruptcy, just in case.

In today’s diversely complex and dynamically changing financial markets, it is no time to hedge your decision to hedge your portfolio, corporation or foreign assets from potential currency exchange fluctuations.

Simply put, a hedge is a protection or defense. http://www.merriam-webster.com/dictionary/hedge The verb “to hedge” evolved from the English and Continental European practice of protecting a parcel of property and limiting its size by planting a fence of the spiny Hawthorn bush or shrub, which secured its boundaries and limited the risk of property invasion or seizure. Today, this same concept is used by hedgers and hedge funds to hedge, or manage, secure and limit exposure to unforseen market and currency movements that are outside of their control. http://www.phrases.org.uk/meanings/hedge-your-bets.html

This basic concept of limiting exposure and protecting the value of a known commodity, such as a parcel of land, has been expanded and diversified into an entire market unto itself, with hedging used defensively, such as by an individual or corporation to protect, and offensively, such as by a hedge fund or speculator, to profit.

Offense vs. Defense

An example of a hedge being used offensively is a hedge fund, which is generally a privately-owned investment fund that utilizes various securities, derivatives and market speculation strategies to profit from perceived financial market or currency inefficiencies, while at the same time employing a layer of uncorrelated protection from adverse market fluctuations. While the strategies used are vast and intricate, the combined approach of profit and protection is generally referred to as arbitrage. Arbitrage trading can also employ a myriad of trading approaches, but in its most practical form, it is the selling and buying, or vice versa, of a currency or commodity contract for profit…the adage “Sell High, Buy Low”. To illustrate, a currency arbitrage trader might “short”, or sell, a borrowed Yen futures contract, with the understanding that it must be returned at a future time. The trader believes that the Yen will depreciate over time and the short position can be “covered” by the purchase of a Yen futures contract at a later date for a price less than for what it was sold. If the “short” was sold at $10, and was covered with a “long”, or purchase, at $8, the arbitrage trade resulted in a net gain of $2. The opposite arbitrage strategy would result in a long position, or purchase, of a Yen futures contract, with the expectation that the Yen will appreciate and will be offset by a short position, or sale, at a higher price at a future date. To illustrate, the long position is taken at $10, the Yen appreciates and is covered by a short position at $12, resulting in a net gain of $2.

The goal of an arbitrage trade is offensive and intended to profit from expected changes in valuation.*

*Source: “When Genius Failed The Rise and Fall of Long-Term Capital Management” by Robert Lowenstein

In contrast, the goal of a defense hedge is to protect the current value of something owned, or something contractually owed at a future date, where the exchange of two different currencies occurs. The difference in value between currencies is determined by the foreign exchange rate, generally referred to as the FX rate, which is used to calculate how much of one currency is required to exchange it for an equal value of another. For instance, if you were a US manufacturer, you would use US dollars, or your local currency, to run your business. If you contracted with a British company to deliver a product in the future, you would likely be paid in British pounds, or their local currency. The number of British pounds required to pay for the product, which is priced in US dollars, is determined by using the US dollar to Great Britain Pound exchange rate, otherwise stated as USD/GBP FX rate. Exchange rates are determined by a number of factors, including demand for a specific currency, political environments, local, regional and global market conditions, among others. As changes occur in these areas, the value of one currency relative to another also changes and is reflected in this rate.

The process of exchanging one thing for another is called conversion. For example, when you go through the McDonald’s drive-thru, the price paid to the cashier is converted into a Big Mac. If Big Macs suddenly became more valuable due to market changes outside of your control, such as a shortage of secret sauce or a government mandate that all citizens must eat at least one Big Mac per day, the perceived value of the Big Mac would increase and the exchange rate between the menu price and your wallet would rise, resulting in a higher price and more dollars will be needed to convert into a Big Mac.

The process is the same when converting currencies. In the earlier example, the US manufacturer would convert the pounds received as payment into dollars.

Herein lies the risk and the need for a defensive hedge.

For instance, if the USD/GBP FX rate today is 2.015, it would take $2.015 USD to equal the value of 1 GBP. If a US manufacturer enters into a contract to deliver 100 units to a British company in 30 days for the equivalent of $100 USD, the British company would agree to pay 49.628 GBP ($100/2.015) in 30 days. In this case, the US manufacturer incurs the risk that the GBP may depreciate, or decrease in value, when the units are delivered and payment is received in GBP.

If, in 30 days the USD/GBP FX rate depreciated to 2.001, it would now take $2.001 USD to equal the value of 1 GBP. The British company is contractually obligated to pay 49.628 GBP. When the US manufacturer receives payment in GBP, it must exchange that currency for USD using the current FX rate. In this case, the converted USD value of the same number of GBP 30 days later is worth only $99.30 (49.628*2.001), or a loss to the US manufacturer of seventy cents.

As protection from this scenario, the US manufacturer could defensively hedge using a futures contract. The first leg would be a short, or a selling position, of a GBP futures contract. In 30 days, the second leg would be a long, or a buying position, to offset the original futures contract. If the GBP depreciates, the loss on the conversion of the actual currencies can be made up with a gain on the futures contract. For instance, if the short position is sold for 2.010, and the long position is purchased for 2.001, the defensive hedge would result in a gain of 0.009.

A defensive hedge may result in a net gain, a net loss or a complete wash, but the goal is to minimize the potential impact of future changes in the FX rate.

Source: http://www.merriam-webster.com/dictionary/conversion

Source: http://wordnetweb.princeton.edu/perl/webwn

Source: Securities Trading Corporation, Series 3, National Comodity Futures Examination

To Hedge Or Not To Hedge…That Is The Question

Who needs to consider whether defensive hedging is a prudent and appropriate strategy? The answer is any individual or corporation that may be impacted by the market conditions and interest rate environment of foreign markets, either directly through investments, real estate holdings or commitments to deliver or accept a specified good at a future date, or indirectly through foreign suppliers.

A 2006 survey by a large North American foreign exchange provider, found that 80% of corporations surveyed acknowledged that their business operations and cash flow is impacted and exposed to currency fluctuations, yet only 42% of those same corporations currently employed a defensive currency hedging strategy to manage that risk. Makes you stop and think…

Using the MSCI EAFE Index (Morgan Stanley Capital International, Europe, Australia and Far East) as a proxy, following were it’s risk/return characteristics as measured from January 1980 to June 1999:

MSCI EAFE
Jan. 1980 to June 1999
Annualized Return (%)
Volatility (1)
Unhedged % USD

13.48%
17.52%

Hedged % US

13.51%
15.29%

(1) Volatility is the relative rate at which the price of a security moves up and down. Volatility is determined by calculating the annualized standard deviation of daily changes in price. If price moves up and down rapidly over a short period of time, it has high volatility, if the price almost never changes, it has low volatility. www.investorwords.com

This simple comparison of the same non-US index on a hedged and an unhedged basis represents the marginal difference between annualized return, but highlights the risk management opportunities when implementing a defensive hedging strategy.

Source: “Using Currency Futures To Hedge Currency Risk”, by Sayee Srinivasen and Steve Youngren, Chicago Mercantile, Inc.

Insulation From Currency Exposure

Many US individuals and corporations believe their operations and cash flows are insulated from FX fluctuations because they operate their business, both domestic and offshore, in their local currency. False…

Consider a US corporation that executes all foreign contracts in USD terms, honors all obligations with suppliers in USD and accepts only USD as payment. Unfortunately, that thermal underwear theory has some holes.

For instance, the same US corporation uses a US supplier, with all transactions conducted in USD. Seems straight forward…until you incorporate that the raw materials used by the US supplier are imported from China. As the market conditions in China change, the FX rate between the Chinese yuan and the USD also changes. If the yuan appreciates, it results in more USD to equal the value of 1 yuan, in turn making it more expensive for the US supplier to purchase the raw materials from China. That loss is then passed through to the US corporation by the supplier, who may increase prices or reduce service to recoup the increased expense of the raw materials. The result is reduced profit for the US manufacturer, driven by changes in FX rates not transparently obvious.

For individuals, the theory is the same. If a portfolio includes direct investments in stocks, bonds or real estate in foreign countries, market conditions and FX fluctuations impact the purchasing power of the USD, resulting in a negative, positive or passive affect on the portfolio return, investment goals and implementation strategy.

Arguments For And Against…A Two Sided Coin

One school of thought against using short-term defensive currency hedge as a risk management tool is referred to as the mean-reversion theory. This approach argues that over the long-term, prices and returns generally move back towards the mean, or the average. The assumption is that the average can be used as a proxy when developing a long-term financial plan or business strategy. While theoretically applicable, if short-term cash flows, budgets and investment income are a material component of managing a business or portfolio, significant short-term FX or market shifts can result in insolvency while waiting for the long-term smoothing effect. Additionally, what long-term is to one is not necessarily long-term to another, and as the old saying goes, markets can remain irrational longer than most speculators can remain solvent.

For individuals, most financial planners generally advise a buy and hold strategy. If an investor is truly in for the long-term, with the patience and stomach to ride out the ups and downs of foreign markets, with no short-term cash flow concerns, mean-reversion may be an appropriate strategy.

For investment vehicles like mutual funds, the investment team’s compensation and bonus structure is generally tied to the quarterly or annual performance of the fund. Particularly for actively managed international, global and regional funds, with the potential for high trade volume and portfolio turnover, incorporating the potential impact of FX and market fluctuations into the overall portfolio’s risk/return characteristics could materially impact the performance and risk profile of the fund.

Source: “Using Currency Futures To Hedge Currency Risk”, by Sayee Srinivasen and Steve Youngren, Chicago Mercantile, Inc.

The Process And Products Used

Once it is determined that a defensive hedge is prudent, a strategy must be crafted. This strategy, typically designed with the aid of an FX trading professional, incorporates the following:

• identify potential currency exposure
• detail hedging objectives and an implementation strategy, including appropriate hedging products, to attempt to mitigate currency exposure
• determine how, when and who is responsible for acting on the potential exposures
• evaluation of the results and adjusting as appropriate

There are a number of products and services available to implement an FX policy.

1. Forward Contract

A forward contract is the most straight forward currency hedging tool. It is an over-the-counter (OTC), or non-exchange traded contract, that allows the initiator to buy or sell at today’s market price, while delaying settlement to a future point in time. Adjustments, otherwise known as “forward points”, are applied to the spot rate to compensate for the interest rate differential between two currencies and the passage of time.

The OTC inter-bank operates based on credit limits for every counter-party, opening the contract initiator to counter-party risk. BIS (Bank for International Settlements), requires banks maintain adequate levels of capital to cover forward-maturing currency transaction risk. This is waived for FX transactions booked through exchanges, where performance bonds are required and daily mark-to-market of all open positions is done.

2. FX Futures Contract

A futures contract allows for the purchase and sale of a currency on a forward-date basis. The upside is that futures contracts are standardized, exchange traded, regulated products, traded in standard amounts by currency with only the most liquid currencies offered against the USD, and four pre-determined expiry dates per calendar year. The efficiency of the FX futures market allows for continuous evaluation of open positions, which are contracts where only the first leg is executed, and ease in making changes or adjustments as risk exposures change over time.

Benefits of exchange traded FX futures contracts over OTC include bringing buyers and sellers together to determine FX prices, with enhanced transparency in trading arrangements. Additionally, whether open outcry or electronic trading, prices are disseminated worldwide by sources such as Reuters, Bloomberg and others. Exchange traded contacts also use a clearing house as the counter-party to the contract, eliminating counter-party risk and the need to evaluate the credit worthiness of multiple counter-parties.

3. Currency Overlay

A currency overlay is a strategy that manages the overall currency exposure of the portfolio separately from the underlying assets. In addition to addressing the currency exposure embedded in the decision to hold a particular, existing asset, it also aids in making a future purchase in a country where there is concern about potential short-term appreciation in the foreign currency, reducing the purchasing power of the USD.

4. FX Swaps

An FX swap is the simultaneous purchase and resale of a foreign currency for different valuation dates. The “near-leg” is dated for the same day, tomorrow or a spot. The “far-leg” is booked for valuation in the future. The difference between the rates for the two dates only applies to forward points between the two specified dates. FX swaps are also used to smooth out short-term cash flow requirements for operations in foreign countries.

5. Non-Deliverable Forwards (NDF)

NDF’s are typically available and used in countries whose currency is controlled or restricted by the central government, such as China or India. In these types of government controlled markets, the actual exchange of currency is restricted to local, resident banks, while offshore entities are generally restricted from actually affecting local currency payments.

In the case of NDF’s, the foreign customer is typically unknowingly exposed to local currency risk even if not sending payment in the local currency due to the generally constant rate of appreciation relative the USD. This results in reduced purchasing power…it takes more USD to buy 1 unit of local currency…so the price increases are passed onto the foreign customer.

A NDF is a forward hedge that cannot be delivered upon. It is closed-out, or “fixed” at expiry, resulting in a marked-to-market gain or loss, which offsets the paper gain or loss that would be achieved if purchasers actually purchased the local currency from an offshore bank.

6. New, Exotic NDFs

Over the past several years, relatively new, “exotic” NDFs have become available, which combine the hedging characteristics of traditional NDFs with the ability to deliver local currency in restricted markets. The new contracts are not materially different from standard major currency forward contracts and provide corporate entities with a means to hedge currency risk and affect local currency payments to suppliers.

Sources: “Using Currency Futures To Hedge Currency Risk”, by Sayee Srinivasen and Steve Youngren, Chicago Mercantile, Inc. and “Foreign Exchange Risk Management” white paper, by Mark Frey, VP of FX Trading at Custom House www.customhouse.com

Choosing An FX Partner

When evaluating an FX partner, look for a range of products and flexibility to change or alter the strategy depending on the corporation or portfolio’s needs. Seek a provider that employs experts in the intricacies of how, when and in what combinations of products should be employed. Ensure that the FX provider is financially stable, with an accessible and knowledgeable customer service team. Look for an on-line platform that is accessible at any time to execute transactions and provide management reporting regarding transaction status and the ability to export the information to your financial software. Also evaluate security and compliance policies to ensure the safety, accuracy and timeliness of all transactions.

When implementing an FX trading strategy, there are generally three options for individuals and corporations:

• Bank
• Dedicated FX provider
• Investment Company

When making a decision about your FX partner, take into consideration that while a bank, financial institution or investment company can likely implement your FX strategy, they may also be constrained by traditional banking hours, the diversity of internal operations, and, in the event they use offensive, and/or leveraged hedging strategies with proprietary or corporate capital, managing their own positions may not allow for a dedicated team solely focused on the intricacies of defensive hedging. They may also be limited in their ability to execute a hedge and affect local currency payment in many developing countries.

Ensure that your FX partner deals routinely with large, commercial banks as opposed to only brokers and investment banks. Your FX partner should have a team of knowledgeable, expert and easily accessible FX professionals who can provide specialized advice and help you or your corporation maintain a stable market position and avoid speculators.

Sources: “Using Currency Futures To Hedge Currency Risk”, by Sayee Srinivasen and Steve Youngren, Chicago Mercantile, Inc. and “Foreign Exchange Risk Management” white paper, by Mark Frey, VP of FX Trading at Custom House www.customhouse.com

In A Nutshell

Simply put, a thoughtfully crafted, short-term defensive FX hedging strategy is similar to an insurance policy designed to protect an investment portfolio, foreign held assets or real estate, short-term cash flow projections and commitments to deliver, or accept delivery, when conversion from one currency into another is necessary. Rather than viewing FX hedging as a complex web of decisions, consider it within the same perspective as auto, homeowners or life insurance…everyday, practical tools used to protect the value of something from unforeseen or unavoidable conditions.

While initially it may seem overwhelming, FX hedging is really not that complex…take the time, understand the upside and downside risks, identify exposures, quantify the potential impact, and work with an experienced FX professional to craft a strategy to protect your portfolio or corporation from unintended and unexpected short-term currency fluctuations and foreign market risks.