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Hedging

During the period of global world crisis you can hedge business risks only on FOREX, which are caused by significant currency rate fluctuations in the foreign exchange market.

Dealing center InstaForex is one of the few companies, offering its clients the consulting services on hedging and program implementation focused on the underlying asset hedging.

Why Forex is practically the only way to insure your capital in the period of macroeconomic crisis?

Exporters have a constant interest to sell foreign currency, while importers - buy it. Currency rates are constantly changing on the international Forex market, and particularly at the period of macroeconomic crisis. As a result the real value of buying or selling goods over the currency may change significantly, and the contract which seemed to be profitable may appear unprofitable. During this period there is a high volatility of the financial market, and it does not allow insuring the capital, especially for an extended period. That’s why the capital contribution into the foreign exchange market Forex is the only way to hedge.

What possibilities give the insurance of investment losses on Forex?

Funds as well as future incomes and expenses in foreign currencies are always at risk. Usually the company takes stock in any of one currency (for example, in US dollars), therefore, as a result of the revaluation of foreign currencies there may be profits or losses due to the rate fluctuations of these currencies. Hedging the currency risk is a protection from unfavorable exchange rates movements, which is to fix the current value of these funds by conclusion of a deal in the Forex market. Hedging leads to the fact that the risk of rate fluctuations disappears for the company, and this gives an opportunity to plan business activity and see the financial result, not changed by rate fluctuations. It also allows charging a price for the products, calculating profits, salaries and etc.

Hedging currency risk with the help of deals without the actual movement of funds (using leverage) gives the following additional opportunities:

  • It does not allow detracting significant funds from the turnover;
  • It allows selling the currency which will be generated in future.

There are 2 major types of hedging: buyer hedging and seller hedging. Buyer hedging is used to reduce the risks connected with possible increase in price. Seller hedging is used in the opposite situation – to limit the risk connected with a possible decrease in good’s prices.

The general principle of hedging in the foreign trade operations is to open a foreign currency position on the trading account in the opposite direction of future operations for the funds conversion. Importer needs to buy foreign currency, that’s why he opens a predetermined position by currency purchase on the trading account, and at the moment of real currency purchasing, he closes the position in its bank. Exporter, on the contrary, needs to sell the foreign currency, that’s why he opens a predetermined position by currency selling on the trading account, and at the moment of real currency selling, he closes this position in its bank. To start hedging it is necessary to open a trading account in the company InstaTrade Corporation, providing services for trading at the Forex market.

Example of company’s actions by hedging risks involved in importing goods from Europe. Importer-company expects a delivery of goods from Europe within one month to a certain amount of euro. The company has dollars on its account and it would have to convert them into euro in its bank. Therefore, the company decides to hedge the risk of increase in euro at the expense of conclusion deals on the trading account with the help of opening deals in the opposite direction. When using credit leverage 1:500 it is necessary to invest approximately 1% from this amount to be insured. In case of increase in euro the company suffers from losses due to market high volatility of the euro conversion in the bank, but the profit on the trading account compensates this loss. The amount of profit and loss will always be zero. Thus, the company released itself from anxiety relatively to possible increase in euro and retained funds for regular operations.

It is important that the hedging expenses are rather insignificant in comparison with the amount of hedging contracts. The aim of hedging is not the removal of extra profit, but reducing the risk of potential losses. Therefore, the effectiveness of hedging at the period of crisis and next two or three years can be estimated only on the basis of the core activities of trading companies. A well-built hedging program not only reduces risk but also the expenses due to the release of the company’s resources.

Do you want to make the company’s flow predictable?

Do you imagine the volume and time of goods realization? Our specialists can open positions for you at the foreign exchange market, which will allow you to avoid losses. For hedging questions, please e-mail support@instaforex.com. Even if you never used hedging assets, we will explain you how it works and develop the most appropriate hedging scheme for your business.

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