Question

Explain ways in which Striking Furs can protect itself against the losses that would arise from a sudden increase in the foreign exchange rate.

Answer 1

1. Hedge your bets

With the U.S. dollar rising, many experts suggest that average investors remove as much of their currency risk as they can..

By hedging foreign assets in the portfolio, the company won't lose any money if the currency of investment is in falls. Of course, no gain if that currency appreciates.

There are two ways to hedge: Buy a currency-hedged mutual fund, or invest in an exchange-traded fund. These funds remove the risk for you, so you only have to worry about stock market returns.

2. Short an overvalued currency

Another way is to short the currency you're exposed to. Someone wanting exposure to Canada would buy the iShares MSCI Canada ETF(EWC) and then short the FXC, a Canadian currency ETF. If the Canadian dollar falls against the U.S. dollar, you'll make up those gains from shorting that currency ETF, said Boyle.

More adventurous investors can simply short currencies they think will fall in value, said Dean Popplewell, the Toronto-based chief currency strategist at OANDA, a company that offers a forex trading platform to investors.

3. Look for high interest rates

Buy the currency of a country that has a higher interest rate than America's. Australia used to be a good place to store cash, said Boyle, because you could make about 4 percent annually just by holding the country's dollar in a bank account or buy owning government bonds.

Many people held money in Brazilian real, too. In 2008 its interest rate was close to 14 percent.

4. Buy undervalued currencies

Just like you would buy undervalued stocks, so, too, can you buy undervalued currencies, said Jalinoos.

The first place to start is by looking at a country's current account deficit—the different between what a country imports versus exports. If the deficit is large, it could be that the currency has become uncompetitive, which would then suggest that it may be overvalued and will fall.