Hedging Forex Trades

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Hedging Forex Trades

http://www.theforexnittygritty.com/forex/hedging-forex-trades

An excellent means of hedging Forex tradesare Forex options. Companies that do business internationally typically use Forex options to guard against the currency risk entailed in foreign transactions. However, hedging currency trades need not be limited to a company in Ohio that is purchasing machine parts from a German distributor or a Japanese company that is buying processed poultry in bulk from a company in Missouri. Calls and puts work for hedging Forex trades and guarding against losses when speculating in either up or down markets.

Calls and Puts in Forex Trades

In Forex trading one thinks in terms of the base currency and the quote currency. When a trader purchases Canadian dollars with US dollars the US dollar is the base currency and the Canadian dollar is the quote currency. In hedging Forex trades with options think in terms of a call on the quote currency purchased with the base currency. If and when the buyer of a call contract on the Canadian dollar with US dollars executes the contract, he will go ahead and purchase Canadian dollars withUS dollars. He will pay the options contract premium with and do his accounting in US dollars. With a put in hedging Forex trades the trader likewise purchases the put on the quote currency using the base currency. But what do calls and puts allow a trader to do in hedging Forex currencies?

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Hedging Forex Trades

  1. 1. Hedging Forex Trades
  2. 2. http://www.theforexnittygritty.com/forex/hedging- forex-trades An excellent means of hedging Forex tradesare Forex options.
  3. 3. http://www.theforexnittygritty.com/forex/hedging- forex-trades Companies that do business internationally typically use Forex options to guard against the currency risk entailed in foreign transactions.
  4. 4. Before We Continue… Click the links below to get your FREE training materials. Free Weekly Investing Webinars Don’t miss these free training events! http://www.profitableinvestingtips.com/free-webinar Forex Conspiracy Report Read every word of this report! http://www.forexconspiracyreport.com
  5. 5. http://www.theforexnittygritty.com/forex/hedging- forex-trades However, hedging currency trades need not be limited to a company in Ohio that is purchasing machine parts from a German distributor or a Japanese company that is buying processed poultry in bulk from a company in Missouri.
  6. 6. http://www.theforexnittygritty.com/forex/hedging- forex-trades Calls and puts work for hedging Forex trades and guarding against losses when speculating in either up or down markets.
  7. 7. http://www.theforexnittygritty.com/forex/hedging- forex-trades Calls and Puts in Forex Trades
  8. 8. http://www.theforexnittygritty.com/forex/hedging- forex-trades In Forex trading one thinks in terms of the base currency and the quote currency.
  9. 9. http://www.theforexnittygritty.com/forex/hedging- forex-trades When a trader purchases Canadian dollars with US dollars the US dollar is the base currency and the Canadian dollar is the quote currency.
  10. 10. http://www.theforexnittygritty.com/forex/hedging- forex-trades In hedging Forex trades with options think in terms of a call on the quote currency purchased with the base currency.
  11. 11. http://www.theforexnittygritty.com/forex/hedging- forex-trades If and when the buyer of a call contract on the Canadian dollar with US dollars executes the contract, he will go ahead and purchase Canadian dollars withUS dollars.
  12. 12. http://www.theforexnittygritty.com/forex/hedging- forex-trades He will pay the options contract premium with and do his accounting in US dollars.
  13. 13. http://www.theforexnittygritty.com/forex/hedging- forex-trades With a put in hedging Forex trades the trader likewise purchases the put on the quote currency using the base currency.
  14. 14. http://www.theforexnittygritty.com/forex/hedging- forex-trades But what do calls and puts allow a trader to do in hedging Forex currencies?
  15. 15. http://www.theforexnittygritty.com/forex/hedging- forex-trades Purchasing a Right and Not an Obligation
  16. 16. http://www.theforexnittygritty.com/forex/hedging- forex-trades When buying options traders pay for the right to buy in the case of a call contract and sell in the case of a put contract.
  17. 17. http://www.theforexnittygritty.com/forex/hedging- forex-trades They are never under any obligation to do so.
  18. 18. http://www.theforexnittygritty.com/forex/hedging- forex-trades Rather a trader will carry out fundamental and technical analysis of Forex currencies and decide that a quote currency is likely to go up or down in relation to the base currency.
  19. 19. http://www.theforexnittygritty.com/forex/hedging- forex-trades If the quote currency is like to go up in relation to the base currency he or she buys a call contract and if he believes that the quote currency will fall he will buy a put contract.
  20. 20. http://www.theforexnittygritty.com/forex/hedging- forex-trades The call contract gives a trader the right to purchase at the contract price which is also called the strike price.
  21. 21. http://www.theforexnittygritty.com/forex/hedging- forex-trades He or she will only execute the contract if the quote price does rise.
  22. 22. http://www.theforexnittygritty.com/forex/hedging- forex-trades An alternative is to simply exit the trade by selling the now more valuable contract and pocket a profit.
  23. 23. http://www.theforexnittygritty.com/forex/hedging- forex-trades In the case of a put the trader expects the quote price to fall and he purchases a put option which gives him the right to sell the quote currency for the base currency which he will do only if the price does, in fact, fall.
  24. 24. http://www.theforexnittygritty.com/forex/hedging- forex-trades And, as with a call contract, he or she can always simply exit the trade with a profit by selling the no more valuable options contract.
  25. 25. http://www.theforexnittygritty.com/forex/hedging- forex-trades Hedging Forex Trades
  26. 26. http://www.theforexnittygritty.com/forex/hedging- forex-trades Why not just buy and sell currencies?
  27. 27. http://www.theforexnittygritty.com/forex/hedging- forex-trades What is the point of hedging Forex trades?
  28. 28. http://www.theforexnittygritty.com/forex/hedging- forex-trades There are a couple of reasons.
  29. 29. http://www.theforexnittygritty.com/forex/hedging- forex-trades The first is that when trading a volatile Euro, US dollar or British Pound there may be profits to be made as well as losses to be incurred.
  30. 30. http://www.theforexnittygritty.com/forex/hedging- forex-trades The point of hedging is that one pays a premium for the insurance of being able to make a profitable trade if conditions become favorable while putting an exact limit on the cost and risk of the transaction.
  31. 31. http://www.theforexnittygritty.com/forex/hedging- forex-trades The other reason for hedging Forex trades is that often times a trader can get into a very cheap call or put contract and make a substantial profit.
  32. 32. http://www.theforexnittygritty.com/forex/hedging- forex-trades He or she does not tie up a lot of cash buy purchasing the quote currency and then waiting for a change.
  33. 33. http://www.theforexnittygritty.com/forex/hedging- forex-trades He or she simply pays a small amount to reserve the right to make a trade.
  34. 34. http://www.theforexnittygritty.com/forex/hedging- forex-trades This is the leverage inherent in options trading and is often the reason for hedging Forex trades with options.

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