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.

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.

Hedging strategies

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.

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. 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:

  • Allows a company to save significant sums of corporate cash flows;
  • Allows a company to sell currency that it will receive in future.

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.



यह भी देखें

BMW X6 from InstaForex

We are happy to announce a launch of a new super campaign «Win BMW X6 from InstaForex», with the main prize – powerful luxury cross-over BMW X6. The campaign is open between December 28, 2015 and December 29, 2017.

More info

InstaForex Loprais Team – official participant of the Dakar rally

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

Liverpool Football Club became InstaForex partner

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

Fx Bot - Droid of InstaForex Future

Fx Bot is the first Forex droid in the world, as well as the member of InstaForex team which symbolizes the effort of the company to provide the latest innovations in the sphere of trading to its clients. Fx Bot, created on the basis of telepresence, was constructed by R.Bot company in Russia - the country with centuries of scientific and technological history. The Russian development of a mobile robot is know-how in technology, which embodies a dream of any businessman to be in a lot of places simultaneously.

More info

Touch the sky with InstaForex!

InstaForex signed agreement with Czech Airlines on InstaForex branded airplane. Trading with InstaForex means not only convenience and excellent quality of products but also the highest speed of execution. Every day new highs of currency trading become closer and closer for traders cooperating with our company.

More info

Victoria Azarenka - the face of InstaForex - the world’s top-ranked tennis player

InstaForex cooperates with 2012 WTA world #1 and two-time Grand Slam Champion, Victoria Azarenka. Partnership with Victoria Azarenka, the leader and idol of modern elite tennis, began in April 2013.

More info
We invite you to start trading with
No Deposit Bonus