How do you hedge Forex positions?
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Tagged with: Forex Questions
Filed under: Forex Information
You can get options on forex. They’re call SPOT (Single Payment Options Trading) or Binary options. Unlike traditional options that have predetermined expiration dates and strike prices, SPOTs are set at prices and dates that you and the counter-party agree upon and how much is paid out. Let’s say you buy the EUR/USD pair at 1.3300 on a mini lot and you want to hedge your position. You can trade an option with the conditions that you feel prices will drop below 1.3225 in the next 14 days and if they do, you get paid say $250 (that’s a 75 pip drop on the actual pair or $75 per mini lot) You pay the broker a premium for this option. If the pair does drop below 1.3225, you are paid the $250 covering your 75 Pip loss on the pair and possibly the premium paid the broker. If the pair doesn’t drop below 1.3225, you lose the entire options premium. You can get more information on them through www.saxobank.com or www.refcospot.com.
You place trades in the direction opposite of your primary position.
For example if you have 2 lots going long on the GBP/USD you can place a trade for 1 lot going short on the GBP/USD.
If you feel your forex position will go down then sell in the Forward market. You get 3, 6 and 9 months forward quotes. So if you feel something will happen in some direction which is not codusive for your position then hedge in these markets. If you sell machinery in a foreign market and you get paid late then if the denominated currency is going to go down, you can use this method to cover up for the forex risk.