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Hedging in Forex: How to Hedge Currency Risk

Hedging in Forex helps limit significant losses and survive falling markets as well as major economic downturns. When you hedge a Forex trade, it reduces your investment risk in the market as hedging strategies can help determine how much loss you can endure as a Forex trader.

What is hedging in Forex?

Forex hedging or currency hedging is a strategy in which you open multiple trade positions to offset any possible currency risks associated with your current position. The goal behind hedging a position is to protect it from unfavourable movements in the exchange rates. Hedging can reduce risk exposure that the Forex market can face due to inflation, changing interest rates, or similar adverse situations. For example, you are trading GBP during the United Kingdom’s elections. To hedge the risk that comes with the UK's currency due to the volatile political sentiment in the country, you choose to include EUR/GBP and USD/GBP in your Forex hedging strategy. To hedge your GBP exposure, you can go long on EUR/GBP and go short on USD/GBP. Taking two opposite positions will mean that if GBP appreciates against USD, the long position will witness a loss, but the short position will offset it. However, if GBP depreciates against USD, the risk associated with the short position will be offset by profits made in the long position. This locks you in on potential profits regardless of the market movements.

Top Forex hedging strategies

Direct or perfect hedging strategy

Forex direct or perfect hedging strategy involves opening an opposite position of the currency pair that you already own to protect your trades. For example, you are long on USD/GBP and you open a short position on the same currency pair with the same trade size. By doing this, you expose yourself to a net profit or loss equal to zero. At times, a direct hedge also enables you to gain some profit by opening the second trade as the trade moves with the market direction.

Imperfect hedging strategy

Forex imperfect hedging strategy is applied to partially protect an open position. In this strategy, some of the risk is eliminated by using call and put options. If you are in a long position, you can buy more of the put option to reduce possible downside risk. But if you are in a short position, you can buy a long position for a call option contract to eliminate the risk associated with an upside movement in the market.

Correlation hedging strategy

Forex correlation hedging strategy involves opening opposite positions for two currencies with a positive correlation or two currencies moving in the same direction. For example, USD/GBP and EUR/GBP have a positive correlation, so you go long on USD/GBP and short EUR/GBP to hedge the trade. This would offset any loss incurred in either trades while locking in potential profits made on the other.

Cross-currency swap hedging strategy

Cross-currency swap helps in hedging the risk associated with inflated interest rates in the economy. It is done mainly by global corporations or institutional investors to avoid losses from adverse market dips. In this strategy, two parties agree on an interest rate at the beginning of the contract, then exchange the principal amount and interest payments in the form of currencies.

Hedging options strategy

Forex options is a product that gives you the right to sell or buy a particular currency pair without any obligation to do so. The price is pre-decided, and an options contract comes with an expiry date. Before the expiry date, you must decide to open a long or short position or let the contract expire. You can hedge by using Forex options in the short term. For example, you wish to buy a currency pair and make a call option for USD/GBP, expecting prices to fall in the future. In that case, you can simultaneously short-sell the same amount with a put option to profit from it.

How to hedge Forex

  • Open a Forex account to start trading.
  • Choose a currency pair to trade.
  • Determine the right Forex hedging strategy that will help you minimise losses and protect potential profits.
  • Apply your chosen Forex hedging strategy or develop a strategy of your own. Keep up to date with international news and announcements.
  • Define entry and exit positions and open a trade position with your chosen currency pair.
  • Use further risk management techniques like stop-loss along with your hedging strategy.

Mitigate losses with Forex hedging

When you hedge a position, you mitigate potential risks and losses that arise from market movement. This helps protect your existing profits and add on to them. With Blueberry Markets, you can smoothly apply different hedging strategies to your trades with our fast trade executions and powerful platform.


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