INTRODUCTION
Market volatility defines the unpredictable nature of the market. It can be defined as the rate or degree to which the price of a trading asset increases or goes down. within a particular period.
It is about the price fluctuations of an asset. The market is highly volatile when the price fluctuates at a very high rate within a short period of time. On the other hand, if the price of an asset moves slowly over a longer period of time, it is considered to have low volatility.
As a trader, you need to understand what volatility in finance entails and you need to know the degree of fluctuations that are likely or possible to happen while trading within a particular period. This implies that when volatility is high, it signifies higher risks, and vice versa.
In forex trading, a forex currency pair within the range of 5–10 pips is less volatile if compared to a pair that fluctuates within the range of 50–100 pips.
However, there are some effective strategies you can deploy to still earn good returns during such a period. These are the strategies.
1; Forward Contracts
A forward contract is a risk-hedging instrument in the form of an investment agreement between two parties to buy or sell a particular commodity or good at a predetermined price at a future date agreed upon by the two investing parties.
The contracts are considered to be over-the-counter (OTC) deals between the two parties involved, meaning that they are not subjected to any official regulation by a third-party authority.
You can also protect yourself from the constant fluctuations of the foreign currency’s exchange rate by entering into an agreement with a bank to buy a certain amount at an agreed-upon future date.
For example, if your firm is dealing in the export of a beverage product and you decide to enter into an agreement with a cocoa production firm to buy 5000 kg of cocoa so as to protect yourself against the fluctuations in the price of cocoa in the market, let’s assume that the current price of cocoa is N100/kg, and both of you enter into a forward contract to buy the 5000 kg of cocoa at N80 per kg after five months, irrespective of what the price is saying at that future time.
If, for example, at the agreed date, the price remains at N100 or moves higher, you have saved some costs. However, assuming that the price of cocoa declines at some future date to N60, that means that the cocoa production firm makes a profit of N20 per kg.
Types of Forward Contracts
Long-Dated Forwards: This is executed for a much longer period compared to the conventional period of a short time. This contract can last for a period of six years or more.
Flexible Forward: As the name implies,this type of agreement allows two of you to execute the deal on or at the expiration of a future date. Examples are Dow Futures
Closed Forward: Here, the rate and the date are fixed. This is where both of you adhere strictly to the terms of the agreement as regards the future date.
It allows you to buy the agreed-upon currencies within a particular range of settlement dates. It gives you the opportunity to get a more convenient exchange rate compared to a traditional exchange contract.
2: Open FCY Bank Accounts
A foreign currency bank account (FCY) can easily be defined as a multi-currency international account that gives you the borderless opportunity to send and receive payments from any part of the globe in various currencies using a single account.
FCY accounts are designed in such a flexible manner that you can easily switch between different currencies, and they also give you the chance to enjoy the advantage of strong currency rates.
Furthermore, the account is not just meant for trading and investment purposes; you can also open it to manage your personal finances.
The Advantages of FXY Bank Accounts
Convenience: It simplifies and improves the convenience and comfort of international transactions.
Multiple Currencies: You have easy access to multiple currencies because you receive and send payments in multiple foreign denominations.
Lower Interests: Regular bank transfers and wire transfers have lower exchange rate fees, thereby saving you money on exchange rate losses. In a nutshell, it offers you a reduced exchange rate and a cheaper conversion cost.
Third Party: It allows you to make payments and transactions with another party at your local branch.
The Disadvantages of FXY Bank Accounts
Charges: They may charge you for overdrafts and other fees such as monthly maintenance fees, international payment fees, FX and conversion fees, just like traditional bank accounts.
Higher Interest Rates: When compared to traditional bank savings accounts, foreign currency accounts come with higher interest rates on deposited funds.
Some banks charge high minimum account balance requirements.
3: Take advantage of government export subsidies. Ireland is a member of the European Union, and the European Union has put some policies in place that investors in the member countries can use to protect themselves against risks during the period of market volatility.
Here are the EU incentives you can enjoy.
Enterprise Europe Network: This EU policy is put in place to help small-scale investors grow internationally through innovations and connections.
It engages in events and programs where you can be connected with viable international business partners to grow your investments, and it also offers you advice on how you can make your business penetrate the international market.
The Tariff Suspension and Quota Scheme in the EU
The policy covered by Article 28 of the Treaty of Rome allows for a temporary suspension of duties on imports of raw materials used for processing.
The major aim of this viable policy is to improve the industrial capacity of business owners in EU countries dealing with processing and manufacturing firms. If you fall into this category, you can apply for a 5-year suspension of the tariff.
To benefit from the policy, the Department of Enterprise, Trade, and Employment (DETE) advertises twice a year, at the beginning of January and July of every year. For example, if you apply in July and your application is successful, it will become effective on July 1 of the following year.
4:Hedging Risks Using Derivatives
Derivatives are investing assets whose prices are determined by or are derivatives of the values of one or more underlying assets. The underlying assets include bonds, currencies, commodities, stocks, and interest rates.
You can trade it over the counter (OTC) or through a standard stock exchange. However, the ones traded on OTC contain higher risk compared to the ones traded on the stock exchange market.
Derivatives trading is active in Ireland, and the country is also a participant in the International Swaps and Derivatives Association (ISDA), which was founded in 1985 to make global derivatives markets more efficient.
Types of Derivatives:
Options: This is a trading contract that binds one party but allows the other party (the buyer) to decide to cancel it at a later date. The exercise right can just be passed on by the buyer after paying the premium to the option’s writer.
Future: A legal trading agreement in which both parties agree on a predetermined quantity and price to be paid at a later date. Example is Dow Stock Futures.
Swaps: These are contracts that enable you and your trading partner to exchange financial obligations or liabilities. The cash flow can be fixed or flexible, depending on the interest rates.
Contract for Difference (CFD): This is a trading instrument where you and the other party agree to pay each other the difference between the opening and closing prices of an asset.
5: Interest Rate Swap
This is a contract between you and the other party to exchange interest payments within a particular set period.
It’s an over-the-counter (OTC) deal where one party agrees to pay a fixed interest rate while the other trading partner pays a variable interest rate. Under the agreement, the principal amount is not involved. What is exchanged is the interest rate.
How it works
You enter into the agreement so as to turn the interest on a variable-rate loan into a fixed interest payment with your borrower to hedge against rising interest rates.
You would still pay your lender a variable interest rate on the loan every month and pay an additional amount to him based on the agreement. Your lender would later rebate the variable-rate amounts, meaning that in the long run, you pay a fixed rate.
6: Currency Swap
A currency swap can be defined as the trading terms between two investing parties to exchange interest payments and principal amounts between two different currencies at a pre-agreed rate between the two parties.
By entering into the agreement, the parties exchange a particular amount of the two currencies and then repay them at a later date in line with a pre-agreed system.
A currency swap is used to hedge against the risk of fluctuations in the foreign exchange market, and the interest payable could be fixed, variable, or both, depending on the agreed structure.
KEY TAKEAWAY
A period of market volatility is generally considered to be an unfavorable harvest period for investors and traders. However, if you are a smart trader, you would not see this period as an excuse for failure but rather take advantage of viable investment strategies to hedge against the risks associated with this period.
