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Hedging

Only Forex market provides an opportunity to hedge the risks caused by significant rate fluctuations.

InstaForex dealing center is one of the few companies providing consultations on hedging and implementing programs aimed at hedging asset.

Why is Forex market the best opportunity to insure your funds in the period of macroeconomic crisis?

Exporters have a constant interest to sell foreign currency, while importers are interested in buying it. Currency rates are constantly changing on the international currency market. As a result the real value of goods bought or sold for the currency may change significantly, and the contract which seemed to be profitable may result in a loss. Currently financial markets are demonstrating high volatility, which does not allow insuring funds, especially for a long term. Therefore, investing in Forex market is the only way to hedge funds.

What opportunities are provided by hedging?

Funds as well as future incomes and expenses in foreign currencies are always at risk. Usually the company stores funds in one currency (for example, in US dollars), therefore, foreign currencies revaluation may result in profit or loss due to rate fluctuations of these currencies. Hedging of currency risk provides protection from unfavorable exchange rate movements. In fact, hedging fixates current value of funds by making deals on the Forex market. Hedging reduces the risk of rate fluctuations to zero, which gives an opportunity to plan business activity and see the financial result undistorted by rate fluctuations, as well as set prices for products, calculate profit, salaries and etc.

Hedging risk with deals not involving any actual movement of funds (using leverage) gives the following additional opportunities:

  • It does not require detracting significant funds from turnover;
  • It allows selling the currency which will be obtained in future.

There are two main types of hedging: buyer hedging and seller hedging. Buyer hedging is used to reduce risks related to possible increase in price. Seller hedging is used in the opposite situation in order to limit risks of price downfall. Main principle of hedging in foreign trade operations is opening a position opposite to the future one. An importer needs to buy foreign currency, that´s why a priori he/she opens a buy position. When it is time for the real purchase of currency in the ban, this position is closed. Vice versa, an exporter needs to sell foreign currency, therefore he/she opens a sell position and at the moment of real currency selling, he/she closes this position. In order to start hedging it is necessary to open a trading account with InstaForex Companies Group, providing trading services on Forex market.

Let us consider an example of how to hedge risks of company importing goods from Europe. Importing company expects a delivery of goods from Europe for certain amount of euro within one month. The company has dollars on its account and it would have to exchange them into euro in its bank. Therefore, the company decides to hedge the risk of the euro growth with the help of opposite deals. Given 1:500 leverage it is necessary to invest approximately 1% from the hedged amount. In case of the euro growth the company suffers losses from euro exchange in the bank due to high volatility on the market, but the profit on the trading account compensates this loss. The sum of profit and loss will always be zero. Thus, the company prevented itself from possible increase of the euro and retained funds for regular operations.

It is important that hedging expenses are rather insignificant in comparison with the amount of hedged contracts. The aim of hedging is not obtaining extra profit, but reducing the risk of potential losses. Therefore, the effectiveness of hedging can only be estimated based on trading company activity. A well-planned hedging program will not only reduce risk, but also cut expenses releasing company´s resources.

If you want to control the company´s money flow and keep track of the volume and terms of sale, our specialists can open positions on the currency market for you, thus allowing you to avoid losses. You can address all your questions related to hedging to support@instaforex.com. Even if you never used hedging, we will explain you how it works and develop the most appropriate hedging scheme for your business.

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