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Hedging in forex trading is a strategy where you open additional positions to protect against adverse movements in the foreign exchange market, typically involving the buying or selling of currency pairs to offset potential losses in another position. Essentially, it’s a risk management technique used to reduce or balance the exposure of an existing position.
Currency Hedging to manage risk
Currency hedging is used to manage risk by strategically opening positions that counterbalance potential losses in your existing forex investments. For instance, in a direct hedge, you might open a position opposite to your current trade in the same currency pair. This method, often referred to as a perfect hedge, effectively neutralises both risk and potential profit as long as the hedge is active.
Although the net profit from such a hedge is typically zero, it enables you to preserve your original market position, poised to capitalise on any trend reversals.
Hedging with Forex options
To hedge with forex options, you purchase options contracts like puts or calls to limit risk on existing positions, with the flexibility to choose whether to execute the trade based…
