Currency hedging. Hedge Example | Workion. ru

There are many complex terms in the field of finance, and moneymakers must understand them.

If you don’t figure out what a word means, you just won’t be able to learn and assimilate the information provided in the Internet. Today we will deal with one term that is often used in business and in the Forex market.

Hedging - what is it? This term came to us from the English language and literally translated as a fence. In this case, the meaning of the word in the fence against risks.

For example, from the risks of losing everything at once, in other words, safety net. Even farmers use this method, and among traders this is a very common concept.

Currency hedging. Hedge Example | Workion. ru

Currency hedging

It is difficult for a beginner to understand such concepts, but in fact, this is a simple method of reducing risks. To put all the points on the line, let's understand this and related terms:

  • Hedging - reducing risk by setting a price agreement in advance.
  • To hedge is to reduce or control risks.
  • A hedger is a person who is insured against the risk of price changes.
  • Forward is a transaction in which agreements are made on the purchase / sale of goods (other assets) after some time, regardless of the change in quotations.
  • Futures is a contract that also involves a deal, but at pre-negotiated prices.

If you explain what hedging is in simple words, it is a previously concluded deal that helps to make a profit in any case (well, or at least cover the costs).

This is applied in many areas, and it is easier to explain how this works on a concrete example.

Currency hedging. Hedge Example | Workion. ru

Example of hedging

Suppose you have a land plot where you plan to grow watermelons. You do this in order to make a profit, but it is difficult to guess what the prices of fruits will be in six months or several months.

To avoid risks, you need to conclude an agreement with the buyer and indicate the value of the goods in it.

Thus, you are insured against a sharp fall in prices, but this can also be a reverse move. What if prices go up? Then you could earn even more, but you have to follow the contract.

Although it is possible to conclude a contract where prices will be higher than the market average, but in this case, the buyer takes risks, so he can refuse futures. Therefore, you need to look for a fine line, and even better, use the prices that are currently installed on the market.

Currency hedging. Hedge Example | Workion. ru

Such a concept is most common among traders. When trading currencies, you have to take serious risks, so it will be good to be safe.

I would just like to say that this technique is not suitable for obtaining maximum profit. It only helps reduce risks.

Currency quotes are constantly changing, so hedging currency risks really helps to protect against serious problems.

There are 3 ways to use a hedge on the market:

  1. Contracts - buying a currency helps reduce the impact of volatility. But such transactions do not bring any profit.
  2. Safeguarding clauses are a type of hedging using contracts that contain additional conditions. You can benefit or incur costs to both parties to the contract, when changing rates. If only one party incurs losses or receives income, the contract is considered one-sided.
  3. Bank deposits - in order not to lose a lot of money on falling rates, deposits are opened in banks. The interest on the deposit helps to restore the balance, even when the quotes fall. If they rise, you can even earn a little.

In this niche, insurance for a long and short hedge is still distributed. Long call the process of reducing risks through the purchase of futures. A short hedge is selling futures.

Financial hedging is applied continuously, even by small companies. The term is difficult, but to understand this method of risk reduction is quite possible without education in the economic sphere. Learn to use risk hedging in your business so as not to lose big money right away.

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