Hedging denotes safety and security. Hedging is protection of the client's funds from unfavorable currency quoting rate fluctuations. The funds on the account are fixed at their current price through conducting deals at Forex. Thus, hedging helps to reduce the exposure to risks connected with the currency rate changes, which helps to achieve the result not being changed by their fluctuations.
In fact, hedging presupposes using one instrument in order to lower the risk which is connected with influence of the unfavorable market factors on the price of a closely connected with it instrument. More often, the notion ‘hedging' means insurances from the currency prices fluctuations, assets etc. Hedging can also be viewed at as a sort of investment, made in order to minimize the risk, connected with price movements at the market. The hedging cost should be valued with regard to possible losses in the event of the refusal from it.
Types of hedging in Forex
The first type is hedging the buyer's funds to lower the risk connected with a possible increase of the instrument price. Another type is hedging the seller's funds in order to lower the risk connected with the decrease of the price.
Example of hedging
A trader who imports foreign currency opens a deal for buying currency on his trading account in advance, and when the real time for buying this currency in his bank comes, he closes his position. And a trader, who is exporting foreign currency, opens a deal for selling the currency on his trading account beforehand, and in the real moment of this currency buying in his bank closes it.
There is a so-called hedging mechanism, which denotes the balancing of obligating documents at the currency market (or securities etc.) and the opposed to it futures market. To hedge capital losses from a particular instrument, the position is opened for another instrument, which can compensate the financial losses.