Hedging is a way for companies to eliminate foreign exchange risk while doing business with other countries that involves financial transactions. When companies do business across borders, they deal in foreign currencies.
Companies must thus exchange foreign currencies for their home currencies when dealing with receivables, and payables respectively. This exchange of one currency for the other happens at the current exchange rate between the two countries. Foreign exchange risk arises when the exchange rate fluctuates unfavorably before the currency is actually exchanged. Hedging in Forex is a way out for companies to minimize or eliminate foreign exchange risk.
Hedging in Forex trading can be defined as holding of two or more positions at a time with an objective to offset the losses in the first position by gaining from the other. With time and experienced forex traders have developed hedging techniques that not only protect them from incurring and offsetting losses but also making profits from foreign exchange. There are several hedging techniques. The most popular & safest one being the 100% hedging technique.
This technique is the safest & most profitable of all hedging techniques which also involve minimal risks. It uses the arbitrage of interest rates, also referred to as roll over rates, between brokers. In this type of hedging one uses two brokers. One broker who pays or charges interest at end of day, and the other broker who doesn’t.
There are several factors that you should take into consideration with 100% hedging in Forex. Like, the currency to use, choosing an interest free broker. Find out if i. the broker allows opening the position for an unlimited time? ii. Does he charge commissions? If you can find a broker who charges $5 flat every night for each lot held, consider yourself lucky, Equity of your account since Hedging requires lots of money, and lastly money management.
One way to manage hedging account is by withdrawing profits every month and balancing positions. Withdrawing the profits and depositing it into the losing account and balance them.
However, this option can also work out to be a costly affair. Don’t forget to check with your broker whether he allows withdrawals while your position is still open. One efficient way of doing this is using the brokerage service withdrawals which is provided by third party companies.