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Hedging

 

I often read articles about hedging. What is it and how do they reduce risk?
Hedging is a way to protect a trader from the risk of incurring losses due to significant changes in a currency’s value. In order to provide security, hedging reduces an account’s exposure to a volatile currency and keeps it safe from fluctuations.

Hedging works by matching each transaction with another transaction directly related to it but going in the opposite direction. This way, traders can reduce the risk of significant losses involved because should one transaction lose, its partner will gain, effectively minimizing any effect  a change in value would have had. The value of hedging can be found in the amount a trader would have lost if it was not present.

Hedging can work both on the buyer’s money to reduce the impact of an increase and on the seller’s money in the event that its value decreases.

For example, a trader can buy the currency of a foreign country ahead of time using his Forex account then close the position when the transaction comes in the bank. The same can be said for a trader selling foreign currency.

 

 

 

 

Created by : AccountGuru
Published : 21 Apr 2014

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