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Chapter 4: How to Use Forex for Hedging
Hedging denotes safety and security. Hedging means the protection of a 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 changes risks, which helps to prevent the risk of currency rate fluctuations.
As a matter of 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. In most cases, the notion of ‘hedging’ means insurance from currency price fluctuations, assets etc. Hedging can also be considered as a type of investment allowing to minimize price movements risks in the market. The hedging cost should be valued with regard to the possible losses in the event of not hedging.
Hedging types in Forex
One type of hedging is protecting the buyer’s money by lowering the risk of a possible increase of an instrument price. Another type is hedging the seller’s money in order to lower a price drop risk.
Here's a hedging example: a trader, who imports in a foreign currency, opens a buy trade with the currency of his trading account in advance, and when the real time of the currency purchase arrives to his bank, he closes the position. And a trader, who exports in a foreign currency, opens a sell trade with the currency on his trading account beforehand, and at a the real moment of this currency purchase in his bank, he closes it.
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