A hedge in forex is a risk management strategy used to protect against potential losses by taking offsetting positions in the market.

What is hedging in forex?

Hedging in forex refers to a strategy used by traders and investors to minimize or offset potential losses from adverse price movements in the foreign exchange market. It involves taking opposite positions in two correlated currency pairs or utilizing financial instruments like options and futures to protect against currency risk.

The purpose of hedging is to mitigate the impact of volatility and uncertainty on a trader’s portfolio by creating a balance between potential gains and losses. Hedging can be employed by individuals, corporations, or institutional investors to manage currency risk and ensure stability in international transactions.

Example of hedging in forex 

Let’s say an investor holds a long position (expecting the currency to appreciate) in the USD/EUR currency pair. To hedge against potential losses, the investor could open a short position (expecting the currency to depreciate) in the same currency pair or a correlated currency pair.

This way, if the USD depreciates, resulting in losses in the long position, the profits from the short position can offset those losses, providing a hedge against risk.


  • An investor expects the USD to appreciate against the EUR.
  • The investor has a long position in USD/EUR, let’s say, of $100,000.
  • The current exchange rate is 1 USD = 0.9 EUR.
  • Therefore, the investor’s position is equivalent to €90,000.

Hedge with a Short Position in USD/EUR:

  • To hedge, the investor could take a short position in the same USD/EUR currency pair.
  • Let’s assume the investor decides to hedge 50% of the exposure, so they short $50,000.
  • This means if the USD depreciates, they could potentially profit from the short position.
  • If the USD depreciates to 1 USD = 0.85 EUR, the long position would lose value but the short position would gain.

Calculating the Outcome:

  • Long position loss: $100,000 * (0.9 EUR – 0.85 EUR) = $5,000 loss.
  • Short position gain: $50,000 * (0.9 EUR – 0.85 EUR) = $2,500 gain.

Net Result:

  • The total loss from the long position is mitigated by the gain from the short position.
  • Net loss: $5,000 (long) – $2,500 (short) = $2,500.
  • The hedge has effectively reduced the risk and limited the investor’s potential losses by half.
This website uses cookies. By continuing, you give us permission to deploy cookies as per our Cookies Policy. See cookie policy