What is currency risk hedging?

Hedging is the conclusion of urgent transactions in the foreign exchange market in order to reduce risks. This method is used if necessary to get rid of price fluctuations.

Allocate currency, interest and price risks. Such operations are often carried out by enterprises that conduct foreign economic activity. In the foreign exchange market, futures are the main instrument of hedging. In this method, buying and selling is not carried out at one time, but at the same rate. This condition reduces the risk.

The following hedging methods are distinguished:

  • classic (opening opposing orders to buy and sell one financial instrument);
  • superior (purchase at a fixed cost);
  • full and partial (insurance in full or incomplete);
  • cross-over (an operation conducted with futures on another instrument, rather than an asset on the real market);
  • intersectoral (adding assets of another segment);
  • selective (insurance with a selective part of an asset).

These are the most common types. Other hedges should be used in case of specific situations.

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