Creating a Simple Profitable Hedging Strategy

hedging strategy

Creating a Simple Profitable Hedging Strategy

The FOREX industry has a great potential. However, the game can get nasty at times. Professional players in the market often have a backup plan in case things turn out negatively. Diversification is one of these strategies as negative impact of one transaction/ investment can be potentially mitigated by another. However, it is not usually possible for beginners and small investors to achieve diversification in their investment.

Similarly, most hedging strategies can be very technical and complex. One needs to be absolute master to truly make use of various hedging strategies as almost all hedging comes at a price. We recommend using Foreign Exchange Options (or currency options) to minimize your risk in case you are confused and unsure about appropriate hedging strategy.

Basically, these currency options allow investors an opportunity to fix the forward rate. For example, you can fix a rate of any of the major currencies today and you will be able to do the transaction at the agreed rate in the future agreed date. Another important feature of this strategy is that it is an “option” and you are not legally bound. What it means is that you can exercise this option if future rate movements are adverse, hence eliminating downside risks. At the same time, however, you can allow this option to lapse if the rate movements are favorable.

This hedging technique is also used as a betting tool by some people as they bet that currency movements will be adverse and hence they buy options to make the FOREX transaction at a better market price. However, there is a catch here.

This option comes at a certain price and therefore it is not advised to use it without due care. You will be paying to buy these options and hence decisions should be made with careful analysis.

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