Posts Tagged ‘Hedging’

Is the options/futures hedging such a good thing?

OK…I spent more than 6 months reading on complex mathematical economical models, but because of that I totally lack the terminology behind the microecomics. One such thing is the futures/options hedging….

So, as far as I understand it – it sounds too good to be true, but do I miss something???
I understand it…like this example:

An investor buys 100,000 eur/usd units. The price is 1.4000.
However, the investor fears of lower price of 1.3900 and hence she puts call option on that price…or a future contract.
If the price reaches 1.3900 she(the investor) exercises the option and hence she is insured and doesn’t lose anything.
If the price goes up – she gains money.

Now, I read about delta hedging and this doesn’t sound that complex too, thuogh I need an hour or 2 to completely understand it.
I also see that you can get advantage from options/futures in many instruments. Such as:

Options,
CFD (illegal in USA)
Forex

But not commodities???

Pls. explain in 1-2 sentences your view…

Thanks alot in advance!

Incoming search terms for the article:

• Hedge with option
• dollar hedge forex

How successful is hedging method apply on currency trading??

I just wanna to see proof from experience traders who trade using the hedging strategy in the forex market

how does hedging work in forex?

I haven’t been able to figure it out. If you invest in two different currency pairs that mirror each other, how does a person expect to make any money, Does anyone know how to do this? which currency pairs do you use and how much can a person hope to earn, percentage wise, in relation to their original investment.
Also I currently use Oanda any problems I should know about regarding this broker?

Thanks in advance

How will the hedging ban affect traders?

In the Rule 24-3b, NFA will be banning all new hedge positions after May 15, 2009.

New Compliance Rule 2-43(b) requires an FDM to offset positions in a customer account on a first-in, first-out basis, thereby prohibiting a trading practice commonly referred to as “hedging.” A customer may, however, direct the FDM to offset same-size transactions even if there are older transactions of a different size. Rule 2-43(b) is effective for any positions established after May 15, 2009. Offsetting positions that were established prior to the effective date do not have to be liquidated, but once either position is closed out after May 15, it may not be reestablished as a hedge.

The word hedging could mean nothing for those who are not into forex trading. Yet those who do trade are aware of the many uses of hedging. Hedge according to investopedia.com is making an investment to reduce the risk of adverse price movements in an asset. Investors use hedging strategies to reduce the impact of negative events on investments.

In forex trading, forex hedge is transaction implemented by a forex trader to protect an existing or anticipated position from an unwanted move in exchange rates. By using a forex hedge properly, a trader who is long a foreign currency pair can be protected from downside risk, while the trader who is short a foreign currency pair can protect against upside risk.

When you hedge, you insure yourself just in case something bad happens. However, this does not mean that you will be 100% unaffected by a negative event. Hedging will simply lessen the impact of a possible negative occurrence.

Huge corporations to small individual investors, hedging is something that is widely practiced. The easiest way to do this is to hedge an investment with another investment. The loss cannot be avoided, but the hedge can offer a little comfort.  However, even if nothing negative happens, you will still have to pay for the hedge.

Whether you decide to use hedging to your advantage or not, you will benefit from learning more about it. You will be able to use hedging to help cut your potential losses, but keep in mind that hedging will never guard against the negatives altogether.

The forex broker which provide hedging with the narrowest spread for EUR/USD and USD/CHF?

I want to know which forex broker has the narrowest spread for EUR/USD and USD/CHF with hedging facility.

a hedging strategy for forex?

I would like to know a simple hedging strategy for forex.

I’m new to forex, I got a demo account right now, but I’m losing money. What’s a good stategy, and what’s a simple way to know which direction a currency is headed.

I know it’s hard but what are some of the obvious indicators. In stocks when there is some scandal or a defective product it’s guaranteed that the price will go down, is there obvious indicators for forex?

What Exactly is Forex Hedging?

For those who are not recognizable with the Forex marketplace, the phrase “hedging” could denote totally nonentity. On the other hand, those who are standard traders are acquainted with the fact that there are numerous ways to make use of this expression in buy and sell. Mainly when you listen to this expression it means that you are trying to decrease your jeopardy in buying and selling. It is somewhat that everybody who devices to endow have to be acquainted with. It is a modus operandi that can guard your savings to some quantity.

While hedging is a trendy trade phrase, it is too one that seems a tad strange. It is a great deal like an indemnity plan. When you prevaricate, you cover yourself in case an unenthusiastic occasion may happen. This does not mean that when an unconstructive incident occurs you will come out of it totally impervious. It only means that if you correctly hedge yourself, you won’t get a mammoth collision. Believe of it like your auto indemnity. You acquire it in case an incident that is awful occurs. It does not put off bad things from experience, but if they do, you are capable to pull through a lot enhanced than if you were not insured in the first place.

Any person who is mixed up in trade can become skilled at the whole concept of the hedge. From massive corporations to diminutive person investors, hedging is somewhat that is extensively practiced. The process in which they carry out this is to engage by means of marketplace instruments to counteract the menace of any off-putting pressure group in price. The easiest method to do this is to hedge a speculation with a different guesswork. For instance, the way largely people would arrange with this is to endow in two dissimilar things with unenthusiastic associations.

This is still expensive to a number of persons though the defence you acquire from doing this is well worth the charge for the most part of the time. When you commence erudition supplementary about hedging, you start to appreciate why not a lot of people totally know what it is all about. The modus operandi used to hedge is completed by using derivatives. These are complex devices of economics and most frequently only used by experienced investors.

If you are interested in the whole concept of hedging of course, you need to read up as much as you can on it and perhaps attend a few courses. If you are investing with a bank, the bank will be able to give you the advice necessary on how and when to hedge and whether or not it would be viable for you in your current investment plan and how much margin you have invested in the market. When you are able to see the big picture and see whether or not hedging will benefit you in the way it should, then you can try to execute this for yourself and protect your investments against risk.

Forex Hedging Systems – are They Useful?

There are many Forex retail traders who attempt to hedge their trades after suffering from substantial equity losses. While this may seem like a good way to limit their losses, a hedging strategy may not necessarily be any help at all. In this article, I will discuss why hedging trades may be a bad idea if you want to limit your trading losses.

What Is Hedging?

The objective of hedging a trade is to reduce the potential losses that may otherwise have been incurred without the hedge.

For example, let’s say I go long on the EUR/USD at price 1.4030. The market immediately goes against me an plunges to 1.4010, resulting in an unrealized loss of -20 pips.

In order to hedge against further losses, I enter into a second trade: shorting at 1.4010 (which is the current market price). This way, if prices fall even further, at least I won’t lose any more pips. If prices fall by a further 5 pips, I would lose 5 pips in my initial long position and gain 5 pips in my second short position, netting a total of zero pips.

The Problem With Hedging In This Manner

This form of hedging is very attractive to inexperienced traders who don’t really understand what they’re doing. At first glance, it looks as if hedging can stop a trader from suffering from further losses, while allowing for the potential of the trade to turn around in his favour. And this is the exact manner of thinking that causes many traders to mistakenly enter into hedging trades like the one I just showed you.

Here’s the problem with this method of hedging:

Even if price do turn around in my favour and moves back up to the price of 1.4030, I will still be suffering from an unrealized loss of -20 pips! Why?

Because even though my initial long trade broke even (current market price at 1.4030 is the same price I went long), my second short trade will be suffering from a -20 pip unrealized loss (remember I shorted at 1.4010), netting a total unrealized loss of -20 pips!

Can you see how that even when prices manage to go back up in my favour, hedging STILL causes me to lose money? If I didn’t hedge at all, I would have at least broken even by now.

And that’s not all. Because I entered into a second (hedging) trade, I had to pay extra transaction fees via the bid/ask spread!

Forex Hedging Strategy – Protection Against Losses

Many Forex retail traders think that hedging is a good way to minimize losses. When holding on to a losing position, they often take up some form of hedging strategy to protect themselves against further capital depletion.

In this article I will discuss what a hedging strategy is, and why it’s a bad idea for retail traders to consider any type of hedging strategy at all… hedging is not for retail traders!

What Is Hedging?

Basically, hedging involves the buying (or selling) of currency pair(s) in order to protect the hedger against unwanted currency fluctuations. Traditionally, hedging was used to protect the profits of multinational companies from unfavourable currency fluctuations.

Hedging is a great way for these companies to protect their profits, but unfortunately many inexperienced Forex traders have incorrectly applied the same principles to their trading activities.

Here’s how a Forex trader may try to hedge his position:

Imagine that I buy the EUR/USD currency pair, and the market immediately moves against my position (i.e. prices went down). At this moment, I would be facing an unrealized loss. In order to ‘protect’ myself against further losses, I might sell the EUR/JPY currency pair in the hopes that any gain in the latter pair will partially offset the losses of the former pair.

Essentially, I’ll be holding on to two simultaneous ‘long’ and ‘short’ positions for the Euro currency. Hedgers hope that the results of both positions will partially cancel each other out.

Why Hedging is A Bad Idea for Retail Traders

This method of hedging is a deathtrap waiting to spring. The original purpose of a hedge was to reduce the uncertainty of company profits.

To the retail trader, however, this does the exact opposite!

Such a hedging strategy simply leaves too many factors open to risk. Although the Euro price fluctuations may be somewhat muted, the ‘retail hedger’ now has worry about the USD and JPY currencies too! The EUR/USD and EUR/JPY pairs are not highly correlated and may end up causing an even larger total loss in the end.

Many people like to hedge because they don’t want to admit that they made a bad trading decision. They try to ‘safely’ hold on to a losing position for as long as possible in this manner, but don’t realize that they’re actually exposing themselves to even greater risks!

Hedging forex risks when trading currency for profit.?

If I were to trade USD/GBR on forex market, what sort of hedge would I use to reduce my level of risk? Ie would I buy other currencies at the same time, or use forward contracts / future contracts or even options. Which is the most common and effective.

Thanks