Hedging in forex trading
There are two kinds of scalpers, those who are bent towards higher risks and then there are those who like playing calculative hedges to stop capital erosion. Both of the varieties have their own special way of dealing with scalp trading and forex offers them both gala opportunities.
Goldman Sachs and JP Morgan believe that hedging can really decrease the risks that are related to the forex market. Derivatives are one smart hedging tool which insures you against currency fluctuations in the portfolio that you hold.
Derivatives permit you to buy a currency from another trader and that too at a stipulated price. Derivatives can be effectively traded in the open market and does not put the individual investor under any obligation.
Futures Contract is another important forex hedging mantra. Top institutes like UBS, AG and Morgan Stanley back the idea to a tee.
There is another method of hedging followed by dealers who have international customers. For instance, a London-based unit or a firm with many customers in France will always feel sad about a weakening Franc as it will give them lesser purchasing power against pounds in a long run. By taking a long-term portfolio or stand in British pound, the company would hedge against the fall in value of Franc.
This way, businesses work against the fluctuating exchange rates and make some money out of it.
Options are another nice tool to hedge. It gives you a chance, just like Futures Contract, to pay only a very small part of the entire investment.
Hedging is used by all kinds of traders today. This might be an internal urge for all those who like to play it safe. At times, it even comes out of a need to protect positions in extremely volatile forex markets.
Leave a comment