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The value of the foreign direct investment may decrease if the currency exchange rate between two countries fluctuates in an unfavourable direction. A second alternative for investors is to use hedging measures to reduce or eliminate currency risk. The following are a few strategies undertaken to minimize risk:
*Currency Exchange Traded Funds (ETFs) may be used to reduce the impact of fluctuations in exchange rates on a portfolio.
*hedging measures can safeguard a foreign investment against currency risk upon reinvestment in the shareholder’s home currency.
* Forward contracts include a rate lock, which enables overseas money to be changed back into the domestic currency later.
* Options contracts are more versatile than forwards but require an upfront premium.