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Hedging

During the period of the global financial crisis only on Forex one can hedge funds against business risks induced by considerable fluctuations of the exchange rates.
InstaForex is one of few companies offering its clients consultations on hedging and realization of the programme aimed at hedging of an underlying asset.

Why is Forex the only way to insure your capital at the time of the macroeconomic crisis?
Companies which deal with foreign trade operations all over the world (exporters and importers) are active Forex participants. Exporters have constant interest in selling foreign currencies, while importers are interested in purchasing them. Foreing exchange rates are ever changing, especially during the macroeconomic crisis. As a result, the real value of a commodity sold or bought can considerably change, and a contract which seemed to be profitable can turn out to be losing. There are analytical departments at big companies which deal with export and import operations. At the moment high volatility on the financial market is observed, and this is the reason why it is impossible to insure the capital, particularly for a long period of time. That is why investment in Forex is the only way of hedging your funds.

What possibilities does insurance of Forex investment losses open? Your funds, as well as future profit or expenses in foreign currencies, are exposed to the foreign exchange risk. Many companies tend to make calculations in one currency (for instance, the US dollar); as a result of revaluation of profit and expense item in foreign currencies, there can be profits or expenses when the rate of a given currency changes. Hedging against the foreign exchange risk is protecting funds from changes in the currency rates, which consists in fixation of the actual currency price by means of deal conclusion. Hedging makes the risk of currency fluctuations disappear, enabling companies to plan future business and foresee the financial result, which is not distorted by currency fluctuations. It also gives the opportunity to set prices, calculate the profit, salaries, etc.

Hedging against the foreign exchange risk with the help of deals without a flow of funds (using the leverage) provides the additional opportunities:

  • It does not imply retrieving considerable funds from the capital turnover.
  • It allows selling a currency which will be received in future.
There are two main types of hedging - Buyer hedging and Seller hedging. Buyer hedging is used for decreasing the risk related to a possible increase in the commodity's price. Seller hedging is used in the opposite situation - for limitation of the risk connected with a possible decrease in the commodity's price. The general hedging principle in case of foreign trade operations lies in opening a position on a certain currency in the opposite direction to a future position for funds converting. An importer needs to buy a foreign currency, that is why he opens a long position on the trading account in advance, and when a moment of the currency purchase comes, he closes the position.

An exporter needs to sell a foreign currency, that is why he opens a short position on the trading account in advance, and when a moment of the currency purchase comes, he closes this position. To start hedging, it is necessary to open a trading account with InstaForex Group which provides services for trading on Forex.

Measures a company importing goods from Europe undertakes to hedge against risks are as follows: a company-importer is waiting for the supply of a consignment from Europe for a certain sum in euros within the month. The company has dollars on its account, and it has to convert dollars into euros at its bank. In this connection, the company decides to hedge against the risk of a euro rate hike, and therefore opens deals on the trading account in the opposite direction. Using the 1:1000 leverage, it is necessary to invest about 1% of the sum which needs to be protected. In case the euro goes up in price, the company suffers losses because of the high market volatility with the euro conversion at bank, but the profit on the trading account compensates this loss. Profit and loss total sum will always be equal to zero. This is the way the company relieves itself of bother about a possible euro rate hike and saves funds for other operations.

Hedging expenses are trivial in comparison with the sum of hedged contracts. The aim of hedging is not generation of profit, but decrease of potential losses. That is why hedging efficiency during crises and subsequent two - three years may be assessed only taking into account the main activity of the trading company. A well-built hedging programme reduces not only risks but also expenditures due to a release of the company’s resources.

If you want to make your money flow predictable and imagine the volume and period of your goods' realization, then our specialists can open positions on Forex for you; it will help you to avoid losses. If you have any questions about hedging, please email us at support@instaforex.com. Even if you have never hedged your assets, we will clearly explain you how to do it and work out the most appropriate hedging scheme for your business.