Hedging is essentially the process of making two offsetting or balancing positions simultaneously. The primary purpose of hedging strategies is to mitigate losses in one position with gains from the other. Bear in mind that for successful profit making with fx hedging, you must be prepared to plough in significant amounts of capital. This is because fx is a highly liquid market with price movements as small as one percent.
Fundamentals of Hedging Strategies
A common way of implementing hedging in fx trades is through pending orders. A pending order entails placing an order that gets executed when the underlying asset’s market price reaches a specific level. Note that a pending order may be placed above or below the present market price.
Other common fx heading strategies are:
Range trading: This helps to make profits on fx by taking advantage of trends. Range trading is most successful with a currency having a fairly small daily range, such that it moves in almost a straight pattern on the chart. The essence of the strategy lies in identifying that range at which the price is likely to reverse. Thereafter, a pending buy order or sell order is placed below or above the current market price, respectively.
Breakout method: This strategy generally works better on currencies that trend, instead of range. The best time to implement this strategy is when the market is moving sideways. In this case, the buying order is placed above the market, while a sell order is placed below the market.
Fx Hedging Strategies: Types of Investment Vehicles
An fx option is a popular hedging vehicle. It gives the buyer the right, but not the obligation, to buy or sell a foreign currency contracts at a pre-determined price on or before the specified expiration date. Fx forward contracts are a similar hedging instrument, which oblige the holder (investor) to either take or make a fx currency payment at a defined point in the future. Note that these vehicles can be used in combination to create a more complex fx hedging strategy.
Spot contracts are other instruments widely used for fx hedging. A foreign currency spot contract entails buying or selling the holding at the existing foreign currency rate. Additionally, what separates spot contracts from future contracts is their short-term settlement date, which is typically done within two days. Due to this short-term nature of spot contracts, they are mostly paired with other long-term vehicles for effective hedging.
Successful Implementation of Hedging Strategies with London Pearson Financial
Successful hedging requires thorough knowledge and extensive practice. For assistance with this intricate task, hire the services of an experienced investment management and brokerage firm. London Pearson (LP) works with both corporate and pension clients to hedge fx and interest rate risk. Primary solutions offered by LP range from Spot transactions to Fx Options and Forwards. Moreover, with London Pearson, you benefit from ongoing assistance from its trading desk, which provides advice after thorough risk analysis on current hedges.
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