3 Ways to Hedge your Funds against Devaluation

Photo credit: The Drum Online

When a currency is devalued, its value reduces. This means that you will need to acquire a higher amount of the said currency in order to purchase goods and services sold in other currencies. No businessperson or investor likes to hear this.

Therefore, the question is this:

“What can you do to protect your funds from devaluation?”

You must have assets denominated in another currency besides that of your home country. The U.S dollars is regarded as one of the strongest currencies in the world. It is therefore smart to invest in dollar- denominated assets such as Eurobonds, Dollar fixed deposit, or foreign stocks.

1. Invest in Eurobonds

“Eurobonds are bonds issued in a currency that is different from that of the country or market in which it is issued. Despite its name, it has no particular connection to Europe or the euro currency.” Investopedia

An investor can choose to either purchase Federal Government Eurobonds or Corporate Eurobonds with attractive yields. [Yield is the return an investor realizes on a bond]. Currently, yields for Eurobonds issued by the Federal Government of Nigeria (FGN) range from 11.39% to 17.48% depending on the current price of the bond and its coupon (interest payment).

Alternatively, the investor can decide to invest in Corporate Eurobonds. Corporate Eurobonds are issued by corporate institutions. Currently, yields on Corporate Eurobonds are between 11.4% and 17.75%.

Most Eurobonds pay coupons (interest) every six months. Hence, the investor will receive coupon payments twice in a year. The minimum amount for Eurobond investment differs across asset management firms.

2. Invest in Dollar Fixed Deposit.

Asset management and investment firms in Nigeria offer dollar fixed deposit investment plans with a minimum capital of about $2,000 to enable investors grow their funds in dollars.

The interest on dollar fixed deposit plans is about 5% or more per annum. The interest is paid every 6 months or structured according to the investor’s preference. Some asset management firms charge more fees than others. Hence, it is important to discuss with them in details all terms and conditions that apply.

Dollar fixed deposit plans are safe and their returns, consistent. This is a perfect hedge against foreign exchange risk.

3. Invest in foreign stocks

The prices of several stocks benefiting from the global stay-at-home trend caused by the Coronavirus have continued to rise as these companies rake in more revenues making investors buy more of the stocks e.g. Zoom video communications rose by 11% in April 2020, and Netflix by 14%.

To purchase foreign stocks you will need a stockbroking firm that has a platform which enables purchase and sale of foreign stocks. Firms that provide platforms for investors to trade in foreign stocks include: Chaka.ng, Robinhood, Risevest and Bamboo.

To discover more about trading foreign stocks, you can contact the above-listed firms via their websites.


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Article Credit: Hephzber Ifunanya Nwoka (Financial Analyst)

Tags: #Investment #Hedging #Eurobonds #Dollar #Naira

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