Investors who have offshore investments are exposed to risks due to currency exchange. Decisions to invest in offshore markets are principally influenced by the fundamentals of economic developments within the offshore market under consideration. The stability of foreign currency is a key factor for investors eyeing international capital investments.
Foreign exchange is attracting more investors in stable economies. Emerging markets like Asia, Eastern Europe and Latin America are attracting many investors due to high profits from the bonds that have high yields. Such capital investments are associated with currency risks since volatile currency and fluctuating currency exchange can affect seriously returns in foreign currency.
Currency exchange risks may adversely affect the investors’ revenues and cash flows. This means the profits realised may be reduced significantly or even totally wiped out. Nowadays, these risks are well managed by professional through various techniques available to them to cushion against losses associated with foreign currency translation.
There are several ways that are available to investors to help them mitigate from losses in offshore market. A number of models have been devised in determination in advance the foreign currency before trading in offshore. This is through forward transaction where two parties agree to peg currency exchange to reduce risk accompanied with currency exchange rates.
To manage translation exposures that are usually experienced by the corporate investors, they apply hedging techniques which involves diversification of currency holdings.
Commercial and political risks can adversely affect risks due to currency exchange. This is risk associated by default and bankruptcy of foreign countries.
Country risks usually occur where Nations are unstable and there are severe military operations hence affecting adversely the operating currency of the host country. Such risks are currently addressed through political insurance cover. The cover insures company against losses incurred through foreign currency adversely affected by political activities.
It is paramount to consult financial advisors before investing in offshore markets. Trading in offshore market is associated with very high risks and an investor may lose all their initial investments and are also bound to even lose more. It is necessary to always gauge the risk due to currency exchange before making that important decision.