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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.
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 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.
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:
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.
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 [email protected]. 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.
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World №1 broker gives its clients a unique opportunity to carry off the legendary luxury sports car! The campaign with Ferrari F8 Tributo as a main prize will be held from December 09, 2019 to December 09, 2022. 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 Ferrari-number, so all contenders have a chance to win.
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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.
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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.
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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.
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InstaForex is one of the world's leading forex brands.For its impeccable quality of work, innovative approach and wide range of services, the company has received many top awards from business magazines and specialized exhibition projects. We are proud of what we have accomplished. However, we aspire to outperform ourselves and strengthen the company's position in such key segments as innovative products, high-quality customer service, and the upgrading trading conditions for retail traders.
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