Ways To Use A Forex Hedge To Shield You Against Fluctuations In The Value Of A Foreign Currency.

What exactly does the term 'forex' mean? And how can one use something like forex to protect you against changes in the value of a foreign country that could otherwise ruin you financially

? Most ordinary men and women won't have much use for this knowledge, but if you want to be a forex trader or you are in any way involved in the import/export market, you should get familiar with the concept of a forex hedge very fast.

Let's say you are a farmer and you produce for the export market in Europe. Your income will therefore be based on the value of the Euro. To labor hard all year and then see a severe depreciation in the value of the Euro just before you want to sell your produce, is heart-breaking and can even lead to financial ruin.

What if there was a way that he can make sure he receives the same dollar income no matter which way the Euro goes in the meantime? A way to insure himself against a falling Euro (or any other currency)?

Lucky for such a farmer, and for everyone involved in transactions involving more than one currency, there is a technique that does exactly this. All you have to do is get in contact with a forex broker and tell him you want to 'go short' on the foreign currency - the Yen, for example. The short transaction should be for the same value as the amount you expect to earn in foreign currency when the time comes.

You will be expected to invest a certain amount of money to carry out the transaction. Since forex markets are what we call 'geared', you don't need to put down the full amount, however. It could be as little as 1% of the actual amount of Euros or another currency you expect to receive.

What happens then is that, should the value of the Euro drop between now and the time you want to sell your harvest, you will get less for your produce, but the 'short' investment you made in a similar amount of Euros will increase in value by exactly the same amount, so you will be ensured to receive the same total payout as if the Euro never changed in value between now and then.

The forex hedge is a much loved technique used by currency traders, banks, other financial institutions and importers/exporters on a daily basis. If your income is in any way determined by more than one currency, you will be well advised to get familiar with how to use this technique.

by: Richie Brawn.

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