Hedging is essentially the process of making two offsetting or balancing positions simultaneously. The primary purpose of hedging strategies is to mitigate losses in one position with gains from the other. Bear in mind that for successful profit making with fx hedging, you must be prepared to plough in significant amounts of capital. This is because fx is a highly liquid market with price movements as small as one percent.
Fundamentals of Hedging Strategies
A common way of implementing hedging in fx trades is through pending orders. A pending order entails placing an order that gets executed when the underlying asset’s market price reaches a specific level. Note that a pending order may be placed above or below the present market price.
Other common fx heading strategies are:
Fx Hedging Strategies: Types of Investment Vehicles
An fx option is a popular hedging vehicle. It gives the buyer the right, but not the obligation, to buy or sell a foreign currency contracts at a pre-determined price on or before the specified expiration date. Fx forward contracts are a similar hedging instrument, which oblige the holder (investor) to either take or make an fx currency payment at a defined point in the future. Note that these vehicles can be used in combination to create a more complex fx hedging strategy.
Spot contracts are other instruments widely used for fx hedging. A foreign currency spot contract entails buying or selling the holding at the existing foreign currency rate. Additionally, what separates spot contracts from future contracts is their short-term settlement date, which is typically done within two days. Due to this short-term nature of spot contracts, they are mostly paired with other long-term vehicles for effective hedging.
Successful Implementation of Hedging Strategies with White Swan Globals Markets Financial
Successful hedging requires thorough knowledge and extensive practice. For assistance with this intricate task, hire the services of an experienced investment management and brokerage firm. White Swan Globals Markets (LP) works with both corporate and pension clients to hedge fx and interest rate risk. Primary solutions offered by LP range from Spot transactions to Fx Options and Forwards. Moreover, with White Swan Globals Markets, you benefit from ongoing assistance from its trading desk, which provides advice after thorough risk analysis on current hedges.