Currency hedging is the act of entering into forward deals to buy or sell foreign currency intended to reduce the risk of financial loss in case of unwanted moves in exchange rates.
What possibilities does insurance of forex investments offer?
Currency funds are exposed to foreign exchange risks. Many companies tend to make calculations in one currency which means that any asset revaluation in a foreign currency is likely to bring about either profits or losses when the rate of a given currency changes. Hedging against foreign exchange risks allows companies to protect their funds from undesirable or unpredictable currency rate fluctuations. Companies may fix the actual cost of funds by conducting deals in the global currency market.
Hedging enables companies to avoid the risk of currency rate fluctuations as well as to plan future business steps and track the actual financial performance, which will not be distorted by market volatility. Moreover, it also provides the opportunity to set prices for goods and services, calculate the company’s profit, salaries, and other expenses.
Hedging against foreign exchange risks with the use of leverage offers additional benefits:
- It does not imply retrieving considerable funds from the company’s capital turnover;
- It allows selling a currency which will be received in the future.
The strategy of hedging against risks in foreign trade operations lies in opening a position on a certain currency opposite to a future position for funds converting.
For example, an importer willing to purchase a foreign currency opens a long position on the trading account in advance and needs to close it by the moment of the actual bank transaction.
Conversely, an exporter is going to sell a foreign currency. Therefore, he opens a short position in order to sell the currency in advance and, by the time of the actual bank transaction, he closes this position.
An example of hedging operation in the currency market:
An importing company is expecting the supply of a consignment from the United States for a certain sum in the US dollars. The company holds euros on its bank account. In order to perform the transaction, the company needs to convert euros into dollars at the bank. By opening a deal on the trading account, the company hedges against the risk of an unexpected dollar rate hike. If it uses the 1:1,000 leverage, it is necessary to invest about 1% of the sum which needs to be hedged. In case the US dollar goes up, the company suffers losses due to exchange rate fluctuations. However, the profit it receives from the deal compensates this loss.
Therefore, the currency price is fixed, and the total sum of profit and loss will always equal zero. As a result, the company eliminates the stress which may be caused by undesirable rate differences and saves funds to use them for other operations.
How to hedge your money against currency risks right now?
To start hedging, open a trading account with InstaForex Group which provides online services for currency trading on Forex.
If you wish to make your company’s money flow predictable and have a clear idea of the volume and period of your goods’ realization, then our specialists can open positions on the currency market for you; this will help you to avoid financial losses. If you have any questions related to hedging, please email us at firstname.lastname@example.org. Even if you have never hedged your assets before, we will clearly explain how to do it and develop the most appropriate hedging schemes for your business.