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What is hedging?

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rohit ch
What is hedging?

Hedging in forex is the practice of opening many positions simultaneously to protect your portfolio from volatility or uncertainty. Therefore, hedging in forex is concerned with offsetting losses on one position with gains from the other. 

Generally, the objective of hedging is to take a position on two dissimilar instruments that have an opposing correlation with each other. In case one instrument depreciates in value, the other is likely to appreciate. This may aid the offsetting of any risk from the declining position with a profit. 

These investment decisions ought to be permitted time of consideration. Rather than hastily arrived at, they are the result of careful thought and analysis. 

Hedging is of higher incidence amongst short-term and medium-term traders. Market volatility lasts only so long. These traders like to take advantage of rapid price fluctuations. 

Long-term position traders, on the other hand, are less interested in considering recent happenings in the market rather, they more frequently open positions on the basis of their predictions for the long-term future. 

Common hedging strategies: Is hedging a good strategy in forex? 

Investors are concerned with hedging in forex use derivatives. The latter are financial contracts that derive their value from stock or some such underlying asset. 

The most common derivative in use is the option. It gives you the right to buy or sell a stock at a particular price within a definite time window. 

How does hedging in forex protect you from risk? 

Let us suppose you bought a stock. According to you, the price would go up. However, you also wanted to shield against the loss in case the price plummets. A put option would hedge that risk for you. 

A small fee would entitle you to the right to sell the stock at the same price. In case it falls, you would exercise your put, having the money-back you had just invested, less the fee.


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