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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?