Importance of Forex Hedge - Learn To Trade

1. Importance of Forex Hedge Hedging has emerged as an important tool in the international monetary market. It can be used by both Forex traders and business ventures for dealing with price volatility. Commercial ventures which deal in import and export of goods are always exposed to foreign exchange. So their requirement of hedging is much more in comparison to other business enterprises. In the contemporary scenario, the world markets are attached to each other. So internal trade among countries has an effect on the value of various currencies. Hedging means decreasing or transferring the various risks and protecting your personal business from uncertainty. With respect to the Forex market, a hedge refers to safeguarding an existing position from a vulnerable currency move.

2. By effectively using the Forex hedge, a player who is lagging behind in the Forex trade can protect himself from losses. The risks could be either upside or downside. In order to create a hedge the following factors have to be kept in mind IE risk component, risk tolerance and how to plan and execute the strategy. The fluctuations in various currencies can affect both the exporters and importers. For example, if we take the example of trade between US and India. If the value of Indian rupee strengthens then it will be beneficial for the Indian importers. If the value of Indian rupee depreciates then the US exporters will earn dividends. In order to tackle the uncertain risks both the parties can use the derivative platform of currency futures. They can create a hedge by developing an equal and opposite position in the currency market. For example if an Indian importer wants to make purchases worth $1, 00,000 in March. But suppose, it will take three months for the actual delivery to occur. In this case, the importer should look at the future currency forecasts. If the value of Indian currency is strong currently, but would depreciate in the duration of three months, then it will be better to make payments now. If the situation is opposite, IE. The value of Indian money is less now, but would get stronger after two months, and then it would be better to make the payment now. Inform Informa ation Provided By tion Provided By Learn Learn T To Trade o Trade