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Hedging in Forex

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Hedging in Forex

Post by Jacq Stone on Thu Oct 20, 2011 11:21 pm

A hedge is an investment that carries out specifically to reduce the risk in another investment. Hedging is more like a strategy designed to minimize the exposure to unwanted business risk at the same time gain profits from an investment. In the other way, think of hedging as insurance. When hedge is done, people are ensuring themselves against negative event. The impact of the negative event is reduced if hedge properly. Hedging is not for making money but reduce the potential loss and hedging occurs everywhere.

Some types of risk are natural to any business activity such as oil price. Risk are not wanted but cannot be avoided without hedging. A hedge for this type of risk is called natural hedging. In natural hedging, undesired risk is reduced by matching cash flows.

Hedging is the favorite technique used by corporations. Income of company was often heard to be reduced by the falling of commodity prices. Reason why companies make an effort to hedge is because there are always risks to their central business. Companies enter a transaction whose sensitivity to movements in financial prices offsets the sensitivity of their core business to such changes. Corporations also hedge for eliminate and managing the types of exposure they facing.

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