Hedging on: effective insurance against trading risks
When working with , it is important to understand the definition of key terms. For example, what is hedging? It turns out that mastering this technique can help reduce transaction risks. Because currency hedging is defined as holding two or more positions simultaneously. Its purpose is to compensate losses from one currency position with profits earned from trading the other position.
Interest rate arbitrage
Traders also understand by hedging Such methods of risk hedging protect the trader quite effectively from "margin calls" (forced closing of positions due to insufficient collateral), because the second position will always show profit even if the first has losses or vice versa.
But there is also many other methods of hedging currency risksThe hedging instruments are the safest hedging instruments. These hedging instruments are the safest. At the same time the technique of full hedging is the most profitable of all methods while maintaining minimal risk. This technique applies interest rate arbitrage (or swaps) between brokers. In this risk hedging method, you will have to use the services of two brokers. One of them will have to pay a percentage for the rollover to the next day, and the other does not have to do that. That is, one of them will count swap trades, and the other will not. However, in this case the trader should try to maximize the profit.
Interest-free broker
However, there are many factors that should be considered when hedging currency risks. First and foremost these are currency pair selection. It is best to use the currency pair with the largest interest rate differential, such as GBP/JPY. However, you should ask your broker what interest is charged in such a case, as brokers may have significantly different rates.
Interest-free broker is the most difficult part of a currency hedging strategy. Before opening a trading account with the chosen broker, it is worth checking whether he allows you to keep an order open, for an unlimited period of time, and whether he charges a commission for the transaction?
So, some brokers simply charge 5$ for each lot in the case of moving a position to the next day. This is actually not bad at all and helps the case. That said, when a broker charges a fee for holding your position, most likely, they are allowing that order to be held indefinitely.
Solid capital
Hedging currency risks requires a substantial amount of capital. For example, if you wish to use the GBP/JPY currency pair for this type of strategy, trading standard lots, you will need to hold approximately 20 000$ in each of your accounts. This is an important point, because for the GBP/JPY pair, the maximum monthly range in previous years was 2,000 pips.
When trading on standard lots, the amount will be approximately 160$. Therefore, when you open a trade order, you automatically forfeit 160$. Thus, the first six days will only be needed to cover spread. So, if you get a "margin call" on one position, you will be forced to close the second position, and then transfer the necessary amount from one account to another, again then opening new orders. Each time, you will lose 160$. That's why it is extremely important not to bring the matter to the forced closing of positions. This can be achieved either by maintaining significant assets, or by moving money quickly between different brokers.
As we can see, hedging currency risks on the market is a very complex process and requires a trader to have a sufficient level of skill and experience.