Hedging in forex

How it works

A business might hedge a future foreign-currency payment, while a trader might offset part of an existing position. The hedge can reduce one risk while introducing cost, basis risk or new exposures.

What to check

Define the exposure first: amount, currency, timing and reason for the hedge. A second leveraged trade that merely moves in the opposite direction is not automatically an efficient hedge.

• Define the exposure being hedged
• Measure hedge ratio
• Include financing and basis risk

Limits and risks

Hedges are rarely perfect and can create financing and transaction costs. Some retail account structures also restrict holding opposite positions in the same instrument.