Using a FX trading platform to hedge

FX Strategy Articles > Fundamental articles

Big business often require a foreign exchange hedging strategy in order to maintain earnings should foreign exchange rates move against them. I say big business, as generally hedging strategies are limited to big business as they operate in many countries simultaneously. Often manufacturing and mining companies are those most at risk. In the case of manufacturing, an increases in the cost of production or a reduction in the terms of trade, due to foreign exchange fluctuations, could have a devastating effect if a business is not properly hedged. Similarly, a mining company sells output on the open market, often in the domestic purchaser’s currency. A reduction in the terms of trade can be catastrophic. Finance companies also closely watch foreign exchange fluctuations especially if funds are sourced in one currency and lent out in another as is often the case.

Historically, big business has used traditional FX brokers to place such hedging strategies. Brokers have been seen as the only alternative to placing large scale trades in liquid markets. However, more and more companies are now using forex trading platforms in order to hedge as transaction costs can be much lower and there is more control in each trade as there is no middle man broker who needs to be consulted when making trades. The turnaround has come because the biggest FX trading platforms now have enough liquidity to deal with the large scale hedging transactions that are required. In some circumstances, big business will use a mixture of brokers and trading platforms in order to fill a position.

We predict that the roll of a traditional broker will diminish over time as more and more volume is placed through the online trading platforms.

Published on 6th of November 2011
eTorro - Trading Starts Here

Start Trading Forex with up to $10,000

  • 100s Videos and FX Strategy articles
  • Advice from our FX traders
  • Practive free with using real time