Foreign exchange hedging refers to the techniques used to avoid foreign exchange risk. This would reduce the chance of incurring a loss when trading currencies.
Hedging is usually done by companies that buy supplies internationally. Currencies fluctuate, so companies use hedging as a way to manage currency trading risks to eliminate potential losses.
There are many forex hedging strategies.
Derivatives are agreements that allow two parties to set a specific date for the trade. Unpredictable currency values. This will allow fair trade between the investors because there is an agreement between them.
Options are derivatives that allow two contracting parties to exercise a right. These rights are called options. Call options allow investors to buy a currency at a fixed rate, while call options allow an investor to sell a currency at a specified exchange rate.
Forwards and futures contracts allow two exchanged parties to set a fixed price for a currency at a later time. Both agreed by the contracting parties to remove risks.
Foreign exchange rates are affected by several factors. These include interests, investments, economic and political changes. This means to avoid unnecessary risks, hedging has been a trend practiced by most companies and traders.
Foreign exchange hedging is not always beneficial for a trader. Opportunity costs are eliminated with this type of activity. You are giving up the opportunity to trade at an advantage or preferably make a profit. Currency fluctuates. You never know if the coin during that time will be in your favor. As a trader, hedging guarantees you more losses but prevents you from making higher profits.