FOREX Hedge Trading Strategies
Hedging is a way of reducing risk in trading by taking two positions, one designed to offset the other. In foreign exchange trading, commonly abbreviated as Forex, investors may attempt to protect against the change in value in one currency by purchasing a position that is affected in the opposite way by this change. Due to the complexity of the Forex market, there are a variety of ways that investors can hedge their bets.
Other People Are Reading
-
Long and Short Positions
-
The most simple method of hedging currencies is to take both a long and a short position in a currency. An investor can take a long position in a currency simply by purchasing it. If the value of the currency then increases, the investor has made money. To protect against a loss, the investor can also short the currency, meaning that he sells another investor the obligation to buy the currency at its current price at a future date.
Futures Contracts
-
Another method of hedging currencies is to buy and sell futures contracts. A futures contract in currency is similar to a futures contract in commodities. It provides the buyer of the contract the right to buy an asset on a future date at a future price. A skillful Forex investor can buy and sell futures contracts for the same date. This means that if both contracts are sold, the investor will break even on the transaction.
-
Currency Swaps
-
A currency swap is a transaction in which two investors swap currencies for a period. The investors then agree to re-exchange the currencies after a period. Often, these currencies are used to make investments such as loans, and, in some cases, the investors will also trade income streams derived from these currencies. However, a Forex investor does not necessarily need another investor to conduct this swap: in a hedge, he can swap with himself.
Complementary Currencies
-
Sometimes, two different currencies will have a history of moving inversely to each other: when one of the currencies goes up, the other currency goes down. If an investor is able to identity two currencies that enjoy this relationship, he can hedge against his investment in one currency by purchasing an offsetting position in the other. That way, if his initial investment loses value, he can expect his other investment to gain roughly the same value.
-
