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.
Key hedging tools include financial derivatives such as futures and options.
These tools can be applied separately or combined. There is quite a number of such combinations.
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.
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:
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.
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.
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 firstname.lastname@example.org. 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.
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.More info
InstaForex is a title sponsor of the official participant of the Dakar rally, InstaForex Loprais Team. This rally team is a joint project of InstaForex, Loprais team, a regular participant of the Dakar rally, and automobile concern Tatra, which provides the team with the famous trucks. The agreement on organizing a team was signed in May 2011 by the pilot of the Loprais team Ales Loprais and the Deputy Director General of InstaForex Dmitry Savchenko. It was a momentous event for both Loprais family and InstaForex company.More info
InstaForex, and legendary Liverpool Football Club announced a two-year partnership that will run until the end of the 2015/16 season. InstaForex will become the Official Online Forex and Binary Options Trading Partner in Asia and the Commonwealth of Independent States (CIS) of Liverpool FC. The new alliance will see InstaForex offer exciting LFC experiences to their customers who are fans in these markets, including tickets to see the Reds play at home in Anfield.More info
InstaForex is the general sponsor of HC Zvolen, one of the oldest Slovak hockey clubs that drafted into the national hockey league. The team is also nicknamed as Knights. InstaForex has a good tradition to support promising sports teams which, as the broker itself, aim to achieve profound results and strive for victory. For the lifetime, Zvolen had proved its mastery, determination and desire to win over and over again.More info
Janko Tipsarević, a Serbian tennis player, is rightly considered to be one of the brightest tennis stars today. In 2001 Janko achieved his first great success, having won Australian Junior Open Championship. However, in contrast to many promising young sportsmen who have never shined in the sky of adult tennis, Tipsarević has become one of the strongest senior tennis players.More info
In 2017 over 3,000,000 clients have already been trading with InstaForex. Of course, such an achievement has been possible only thanks to efforts and professional work of our close-knit team.More info