A hedge is usually a strategy employed by multinational corporations in order to offset risk associated with currency movements. Hedging is done when companies receive money for goods in currencies other than their local currency.
Example of Hedging:
A large exporter from the European Union sells to a big client in the United States, with delayed payment upon delivery. In the meantime, if the euro strengthens against the U.S. dollar, the exporter will receive fewer euros for his merchandise, affecting his bottom line.
The solution would be a “long” EUR/USD hedge, which would eliminate any downside risk caused by potential wild currency fluctuations. With this kind of hedge, corporations gain certainty of price.
In the Forex market, hedgers are looking to insure themselves against an adverse price movement in a specific currency rate. A hedge is a position or combination of positions that neutralizes or reduces the risk of your primary position.
Some hedging strategies involve buying and selling in a currency at the same time, which can prove to be really tricky, so that experience and expertise is needed before trying it. Be aware of the fact that not all brokers allow hedging, so make sure you check with your broker first.
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