Forex Hedging Strategies – Multiple Currency Hedging

Forex Trading App Best -Not only does the forex market see an estimated $6.6 trillion traded globally every single day, but this is also one of the most volatile and complex entities of its type.

For upon | The market is also home to several different trading strategies and techniques, with forex hedging offering a relevant case in point. This refers to the act of reducing to preventing losses that occur from unexpected events in the marketplace, as a way of negating the sector’s inherent volatility. Forex Trading App Best.

But what are the best hedging strategies for those engaged in forex trading? Here’s our selection (and explanation) of our top three.

1. Simple Hedging

As the name suggests, this is the most basic form of hedging and one that sees an individual investor looking to mitigate currency risk.

For example, let’s say that a US-based investor wants to buy a foreign asset that denominates in British pounds. In this instance, he faces two significant risks, the first of which is that the underlying share price falls either suddenly or unexpectedly. Forex Trading App Best.

Secondly, the GBP may also fall significantly against the greenback, potentially eliminating any potential profits in a matter of moments.

To offset this, the investor would be willing to simply hedge the position using the GBP/USD currency pairing, which effectively shorts the pound at the current spot rate and locks in the exchange rate to provide much-needed protection against any subsequent shifts. Forex Trading App Best.

1. Multiple Currency Hedging

Next on our list is the multiple currency hedging strategies, which involve selecting two currency pairs that are positively correlated (such as the GBP/USD and EUR/USD). Forex Trading App Best.

Then, you open positions on both pairs simultaneously, ensuring that these cover both directions and provide optimal protection against any future market shifts.

More specifically, if you go short on the EUR/USD pair, you should hedge your greenback exposure by opening a long position on the GBP/USD exchange price. In this instance, any losses on the long position would be mitigated by the profit made by shorting the EUR/USD, while your hedge would perform the same feat in the opposite scenario. Forex Trading App Best.

This is slightly more complex than the simple hedge, of course, while it also opens up additional risk and exposure in an incredibly volatile and fast-moving space.

1. The Forex Options Hedging Strategy

A currency option affords the holder the right (but not the obligation) to exchange a currency pair at a given price before a set time of expiry.

As you can imagine, options represent particularly popular hedging tools, as they automatically enable you to reduce your market exposure while only requiring you to pay for the individual cost of the option. Forex Trading App Best.

Let’s say that you’ve gone long on AUD/USD, for example, having initially opened your position at $0.76. However, you’re anticipating a steep decline and choose to hedge this risk with a put option at $0.75 with a four-week expiry. Forex Trading App Best.

If the price has fallen below this option at the time of expiry, you’ll have incurred a loss on your long position.

However, your option would have generated a profit, while you can simply let this expire for the mere cost of the premium in instances where the AUD/USD rises. Forex Trading App Best.

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