The Use Forex Trading as Hedging of Currency Risks

Companies engaged in foreign trade transactions worldwide are active participants in international Forex market. For exporters, there is a constant need to sell foreign currency, while for importers the constant need to buy it. Currency exchange rates in the international currency market are constantly changing. As a result, the real value for the goods or services can significantly change and a profitable contract may not be as profitable or unprofitable based on changing exchange rates. Of course, the reverse situation can occur; when a changing exchange rate causes more of a profit. Nonetheless, the task of a trading company is not to lose or profit from these varying exchange rates. For commercial companies, it is important to be able to plan the real cost of buying or selling a product. Therefore, companies attempt to hedge their currency risks. Cash, as well as future income or expenses in foreign currencies subject to exchange rate risks. Normally, accounting for the company is in one currency, for example in United States dollars. Therefore, the revaluation of articles in foreign currencies may gain or lose when the rates of these currencies change.

Hedging currency risk

Hedging currency risk - is to protect oneself from adverse movements in exchange rates. That is to fix the present value of these funds by entering into transactions on the Forex market. Hedging leads to a company diminishing its risk, which makes it possible to plan activities and to see that financial results are not distorted by exchange fluctuations. Transactions in the Forex market are carried out under the principle of margin trading. This trade has a number of features, which has made it very popular. A small start-up capital allows for a transaction many times the invested amount (in the tens and hundreds). This surplus is called leverage. Trade is conducted without a real money supply, which reduces overhead and provides an opportunity to open positions as buying or selling currency. A feature of hedging currency risk through transactions without the actual movement of funds (using leverage) is that you do not divert significant funds from the company’s coffers.

There are two basic types of hedging - buying hedging and selling hedging. Buying hedging is used to reduce the risks associated with a possible rise in the prices of goods. Selling hedgin is in the opposite situation - to limit the risks associated with a possible decrease in prices of goods.

The general principle of hedging in the foreign trade transactions is to open foreign currency positions on the trade account and put aside funds for future operations through the conversion of funds. The importer must buy foreign currency, so it opens up the position of pre-buying the currency on the trade account. When the moment he recieves the goods, he places hisreal currency enters his bank, and closes the position. Exporter must sell foreign currency, so it opens up the position of pre-selling the currency on the trade account, and when the moment the real foreign currency enters his bank, he closes the position.