What is the principle of foreign exchange hedging trading? H
2023-06-20
What is the principle of foreign exchange hedging trading? How to use foreign exchange hedging?
What we call hedging means buying foreign exchange and shorting at the same time. In addition, other currencies must be sold, that is, short selling. Theoretically speaking, if you want to short a currency, just like shorting a currency, you must have a silver yardage to be considered a real hedging order. Otherwise, the two sides are different in size and cannot play a hedging role. Please note that here are two groups of currencies, and what is said below is the same group of currencies locked. Today we will talk about what is the principle of foreign exchange hedging trading? How to use foreign exchange hedging?
in principle:
The global foreign exchange market is based on the US dollar. All foreign exchange rises and falls are based on the US dollar exchange rate as the relative exchange rate. A strong renminbi means a weak foreign currency, and a strong foreign currency means a weak dollar. The rise and fall of the dollar affected the decline of all foreign currencies. Therefore, if we are bullish on a currency, but to reduce risk, we need to sell a bearish currency at the same time. Buy a strong currency and sell a weak currency. If the calculation is correct and the US dollar weakens, the strong currency you buy will rise; even if the calculation is wrong, but the US dollar strengthens, the currency will not fall much. Short selling of weak currencies has fallen sharply, and the loss is small and the profit is large, and the overall profit can still be made.
Example:
With the end of the Iraq war in the Middle East, the United States became the victor of the war, and the dollar also rose steadily and became stronger. The dollar also rose against all foreign currencies, and only the Japanese yen remained strong at that time. It was shortly after the fall of the Berlin Wall, Germany had just been reunited, East Germany was economically backward, and the German economy was in trouble. Political turmoil in the Soviet Union, Gorbachev's status was shaken. At that time, the UK economy was also bad and continued to decline, and the Conservative Party was challenged by the Labor Party, so the pound was also weak. After the war, as a refuge from war, the Swiss franc became less attractive and became a weak currency.
If you buy foreign exchange at that time, sell British pounds, marks, and Swiss francs for a long time, and buy short Japanese yen at the same time, it will be a considerable income. When the U.S. dollar rises, all foreign currencies fall, only the Japanese yen falls the least, while other foreign currencies fall; when the U.S. dollar falls, other currencies rise less, but the Japanese Yen rises greatly. Either way, just hedge against the prevailing market and profit.
Therefore, you can see from the above description that the biggest advantage of hedging transactions is to reduce the risk of single-line transactions.
What about his flaws?
1. Because it is a hedging transaction, one of your two operations must be at a loss. Therefore, the profit you make is the profit you make to offset the loss, and the profit you get will be relatively small.
Hedging transactions, two buy and sell transactions, your transaction costs are also higher than single-line transactions.