What is hedging?

Hedge is a kind of insurance. Hedging currency risks is actions meant to lessen risks related to volatility of foreign exchange rates. When traders decide to hedge, they decide to protect themselves from possible losses.

However, it is difficult to grab the principle of hedging from a simple definition. We are going to enlarge on tools, types, methods, and strategies of hedging deals on Forex as well as give some examples.

Hedging tools

Key hedging tools include financial derivatives such as futures and options.

  • An option gives its owner the right to buy or sell a chosen asset at an agreed-upon price in the future.
  • Futures obligate the owner to purchase or sell an asset at a predetermined future date and price.

These tools can be applied separately or combined. There is quite a number of such combinations.

Hedging strategies

A wisely chosen strategy increases success chances. Here are listed some of the strategies.

Hedging futures. Selling futures in the derivatives market in the volume compatible with the volume of hedged goods.

Buying put options. A put option gives you an opportunity to sell futures at the time and price convenient for you. When buying a put option, you fix the minimum price so you can profit from a higher price in the future.

Selling call options. A call option seller will have a bit bigger advantage than a call option buyer. The latter one will have a reward from selling every unit of a call. The seller can sell futures at the execution price.

When choosing a strategy, take into account the current economic situation and all possible prospects and keep analytics in mind.

What opportunities does Forex hedge give?

Funds kept in foreign currencies are prone to currency risks. A company’s accounting is usually carried out in one currency, which means some profits or losses may appear when re-evaluating items in another currency due to different exchange rates. Hedging currency risks allows the company to protect its funds from undesirable and unpredictable changes in exchange rate dynamics. The company fixes the value of current funds through trades in the international currency market.

Hedging helps the company avoid risks of currency fluctuations and plan further work. It also shows real financial results not affected by currency volatility as well as production value, corporate revenues, wages and other expenses.

Using leverage, when hedging currency risks, gives extra opportunities:

  • Allows a company to save significant sums of corporate cash flows;
  • Allows a company to sell currency that it will receive in future.

Hedging corporate risks at foreign trade operations implies opening a currency position opposite a future funds conversion.

For example, an importer opens a buy deal on a certain currency beforehand and closes it once the real purchase in the bank takes place.

An exporter, on the opposite, sells foreign currency and has to open a sell trade beforehand and close the trade when the real sale takes place.

Forex hedging process

Example of hedging on Forex

Suppose an importing company has been awaiting a shipment of a certain value from the United States for n days. The company has euros on its account. To make a deal, the company has to convert its euros into the US dollars. The company decides to hedge risks of a sudden surge in the greenback. With the 1:1,000 leverage, around 1% of the sum that will be hedged should be invested. If the dollar starts rising, the company will suffer losses; however, profits generated from the opened trade will offset the losses.

Therefore, the currency exchange rate is fixed; and profits with losses equal zero. As a result, the company does not need to worry about undesirable changes in currency rates and saves money for other operations.

How to hedge your funds against currency risks right now?

First of all, you need to open a trading account with InstaForex which renders currency trading services.

If you want to make your company’s cash flow predictable and you know volumes and terms of goods selling, our specialists can open certain market positions to help you avoid losses. If you have any questions, feel free to contact us at support@instaforex.com. Even if you have never hedged assets, we will clearly explain how to do it and develop the plan that will suit your business the most.

See also

Ole Einar Bjørndalen - the brand ambassador of InstaForex

InstaForex is pleased to announce that Norwegian winter sports icon Ole Einar Bjørndalen, 8-time Olympic gold medallist, 20 world championship titles holder, and 6-time overall World Cup winner, becomes a brand ambassador of InstaForex. Cooperation with the greatest athlete in the history of winter Olympics ever symbolically started in winter 2015. Despite his impressive track record since his first victory 20 years ago, Bjørndalen confirmed his status of the "King of Biathlon" at the Sochi Games winning two golds.

Ole Einar Bjørndalen - the brand ambassador of InstaForex

InstaForex is pleased to announce that Norwegian winter sports icon Ole Einar Bjørndalen, 8-time Olympic gold medallist, 20 world championship titles holder, and 6-time overall World Cup winner, becomes a brand ambassador of InstaForex. Cooperation with the greatest athlete in the history of winter Olympics ever symbolically started in winter 2015. Despite his impressive track record since his first victory 20 years ago, Bjørndalen confirmed his status of the "King of Biathlon" at the Sochi Games winning two golds.

Win Lamborghini from InstaForex!

World №1 broker gives its clients a unique opportunity to carry off the legendary luxury sports car! The campaign with Lamborghini Huracan as a main prize will be held from December 26, 2016 to December 20, 2019. Anyone who tops up their account with $1,000 or more and register for the campaign can compete for the posh car. The winner will be determined randomly with the help of Lamborghini-number, so all contenders have a chance to win.

Win Lamborghini from InstaForex!

World №1 broker gives its clients a unique opportunity to carry off the legendary luxury sports car! The campaign with Lamborghini Huracan as a main prize will be held from December 26, 2016 to December 20, 2019. Anyone who tops up their account with $1,000 or more and register for the campaign can compete for the posh car. The winner will be determined randomly with the help of Lamborghini-number, so all contenders have a chance to win.

U.S. Città di Palermo - new InstaForex partner

Italian football club Palermo has become the company`s new partner. The football club has more than 100 years of history since it was founded in the year 1900. In autumn 2015, InstaForex signed an agreement with the football team from sunny Sicily in the height of the 2015–16 Serie A league. At the moment, Palermo is fighting for the high places in the championship. Such players as Alberto Gilardino, a world champion of 2006 for Italy, and Franco Vazquez, one of the best forwards of the Italian national team at the moment, form one of the strongest attacking lines at the championship in Italy.

U.S. Città di Palermo - new InstaForex partner

Italian football club Palermo has become the company`s new partner. The football club has more than 100 years of history since it was founded in the year 1900. In autumn 2015, InstaForex signed an agreement with the football team from sunny Sicily in the height of the 2015–16 Serie A league. At the moment, Palermo is fighting for the high places in the championship. Such players as Alberto Gilardino, a world champion of 2006 for Italy, and Franco Vazquez, one of the best forwards of the Italian national team at the moment, form one of the strongest attacking lines at the championship in Italy.

Loprais and InstaForex: traditions, progress, leadership

Ales Loprais is the pilot and the PR manager of a rally crew InstaForex Loprais Team. He also owns an auto parts manufacturing company specializing in world-famous Tatra trucks. Ales was born on January 1980 in Olomouc, the Czech Republic, into a family of the Dakar Rally champions. He was brought up in the atmosphere of endless preparations for rallies. Since early childhood Ales has been involved into car repairing, spending more time in the garage than at home.

Loprais and InstaForex: traditions, progress, leadership

Ales Loprais is the pilot and the PR manager of a rally crew InstaForex Loprais Team. He also owns an auto parts manufacturing company specializing in world-famous Tatra trucks. Ales was born on January 1980 in Olomouc, the Czech Republic, into a family of the Dakar Rally champions. He was brought up in the atmosphere of endless preparations for rallies. Since early childhood Ales has been involved into car repairing, spending more time in the garage than at home.

Will to win – this is what Ilona Korstin and InstaForex have in common!

Basketball player Ilona Korstin who is a multiple European champion and prize winner of World championships and the Olympic Games is the new face of international broker InstaForex for 2011-2012.

Will to win – this is what Ilona Korstin and InstaForex have in common!

Basketball player Ilona Korstin who is a multiple European champion and prize winner of World championships and the Olympic Games is the new face of international broker InstaForex for 2011-2012.

InstaForex: reach for the sun

In summer 2012 at the international trading convention, InstaForex Company demonstrated its branded aerostat with the official logo on it. Trading with InstaForex is an opportunity to rise above the routine, work troubles and financial problems and plunge into your favorite activity.

InstaForex: reach for the sun

In summer 2012 at the international trading convention, InstaForex Company demonstrated its branded aerostat with the official logo on it. Trading with InstaForex is an opportunity to rise above the routine, work troubles and financial problems and plunge into your favorite activity.

Start trading with
no risks and investments
With new Start-Up Bonus of $1000