Hedging denotes safety and security. Hedging is protection of client's funds from unfavorable currency rate fluctuations. Account funds are fixed at their current price through conducting trades on Forex. Thus, hedging helps to ease exposure to currency rate change risks, which helps to achieve result not influenced by fluctuations.
In fact, hedging presupposes using one instrument in order to lower the risk related to unfavorable market factors impact on the price of another one directly associated with it. More often, the notion ‘hedging’ means insurance from the currency price fluctuations, assets etc. Hedging can also be considered as a type of investment allowing to minimize the price movements risk in the market. The hedging cost should be valued with regard to possible losses in the event of refusal from it.
Hedging types on Forex
The first type is hedging the buyer’s money to lower the risk of possible increase of an instrument price. Another type is hedging the seller’s money in order to lower a price drop risk.
Hedging example
A trader, who imports foreign currency, opens buy trade with a currency on his trading account in advance, and when the real time of currency purchase comes in his bank, he closes the position. And a trader, who exports foreign currency, opens a sell trade with a currency on his trading account beforehand, and at a real moment of this currency purchase in his bank, he closes it.
There is a so-called hedging mechanism, which implies obligations balancing in the currency market (or securities market etc.) and the opposite futures market. To hedge capital losses from a particular instrument, the position is opened with another instrument, which can compensate financial losses.
