empty
 
 

Forex Hedging: Hedge Strategy

Nowadays changes in exchange rates concern any business. So you need to protect your funds in order not to lose all your money due to an abrupt change in currency rates. One of the most widespread ways of protecting funds is forex hedging.

What is forex hedging?

Hedge is a kind of insurance. Forex 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 forex hedging from a simple definition. We are going to enlarge on tools, types, methods, and strategies of forex 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.

Forex hedging strategies

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

Forex 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 hedging 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. Forex 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.

Forex 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 forex 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.

Forex 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

Grand Choice Contest by InstaForex

InstaForex always strives to help you fulfill your biggest dreams. We all have different dreams and goals. We have taken it into account before launching our new contest. This time, we have prepared more than one prize. The winner will have the opportunity to decide which of the dreams to pursue.

Grand Choice Contest by InstaForex

InstaForex always strives to help you fulfill your biggest dreams. We all have different dreams and goals. We have taken it into account before launching our new contest. This time, we have prepared more than one prize. The winner will have the opportunity to decide which of the dreams to pursue.

InstaForex - official partner of Dragon Racing

InstaForex - official partner of Dragon Racing

The world of professional motor racing, just like the financial world, is constantly developing and introducing the latest technologies that eventually become ordinary parts of our everyday lives. This happened with turbo motors, KERS system, ceramic brakes, online trading, as well as PAMM and ForexCopy systems. Back then, it all seemed something unique and available only to chosen ones. Today, we drive electric cars and can easily trade on the global forex market via gadgets that we carry in our pockets.

InstaForex - official partner of Dragon Racing

The world of professional motor racing, just like the financial world, is constantly developing and introducing the latest technologies that eventually become ordinary parts of our everyday lives. This happened with turbo motors, KERS system, ceramic brakes, online trading, as well as PAMM and ForexCopy systems. Back then, it all seemed something unique and available only to chosen ones. Today, we drive electric cars and can easily trade on the global forex market via gadgets that we carry in our pockets.

InstaSpot

InstaSpot

We have created a convenient service for buying, selling, and exchanging currencies, cryptocurrencies, and other assets.

InstaSpot is a trustworthy service for a trader, miner, freelancer, and for everyone who does business on the Internet.

Familiarize yourself with a user-friendly and reliable exchanger for digital currencies and other popular assets. InstaSpot is based on the principle of P2P trading, which allows buyers and sellers to interact directly without intermediaries. At the same time, InstaForex acts as a guarantor of the secured transaction.

InstaSpot

We have created a convenient service for buying, selling, and exchanging currencies, cryptocurrencies, and other assets.

InstaSpot is a trustworthy service for a trader, miner, freelancer, and for everyone who does business on the Internet.

Familiarize yourself with a user-friendly and reliable exchanger for digital currencies and other popular assets. InstaSpot is based on the principle of P2P trading, which allows buyers and sellers to interact directly without intermediaries. At the same time, InstaForex acts as a guarantor of the secured transaction.

InstaForex branded products

InstaForex branded products

InstaForex offers to purchase various products with the company's logo at the manufacturer's prices: office stationery, accessories, clothing, and other goods.

We also present a wide range of marketing tools aimed at attracting new customers: banners, brochure templates, different training materials, special certificates, and forex informers.

InstaForex branded products

InstaForex offers to purchase various products with the company's logo at the manufacturer's prices: office stationery, accessories, clothing, and other goods.

We also present a wide range of marketing tools aimed at attracting new customers: banners, brochure templates, different training materials, special certificates, and forex informers.

InstaForex helps its clients to make their dreams come true!

InstaForex helps its clients to make their dreams come true!

Participation in InstaForex campaigns is a unique opportunity to fulfill your dreams. You may win a cutting-edge gadget or a high-class car. Besides, both savvy and novice traders can participate in the contest.

So, join in and try your luck with InstaForex! Remember that sometimes victory is not the most important thing. Apart from this, you will also get new experience and trading skills, worthy competition, and valuable prizes.

InstaForex helps its clients to make their dreams come true!

Participation in InstaForex campaigns is a unique opportunity to fulfill your dreams. You may win a cutting-edge gadget or a high-class car. Besides, both savvy and novice traders can participate in the contest.

So, join in and try your luck with InstaForex! Remember that sometimes victory is not the most important thing. Apart from this, you will also get new experience and trading skills, worthy competition, and valuable prizes.

Vladimír Moravčík - new Instaforex Brand Ambassador

Vladimír Moravčík - new Instaforex Brand Ambassador

In 2005 Vladimír won the Open Poland Championship, and in the same year he became the European S-1 Champion. He won his first world title in 2007 in Hong Kong. During his career, Vladimír Moravčík received 10 European and world titles from various associations. One of his recent achievements was the title of the world champion Enfusion Live 2017.

Vladimír Moravčík - new Instaforex Brand Ambassador

In 2005 Vladimír won the Open Poland Championship, and in the same year he became the European S-1 Champion. He won his first world title in 2007 in Hong Kong. During his career, Vladimír Moravčík received 10 European and world titles from various associations. One of his recent achievements was the title of the world champion Enfusion Live 2017.

Can't speak right now?
Ask your question in the chat.
Widget callback