Hedging

What is hedging used for?

Companies and investors reduce the currency risk they carry from future foreign-currency payments or foreign assets with offsetting trades. An exporter expecting US dollar revenue, for example, can fix an exchange rate with a forward contract to protect against a fall in the dollar.

What is the difference between hedging and netting accounts?

On forex platforms, hedging usually means being able to keep opposite positions on the same pair open side by side. This is possible in MetaTrader 4 and in MetaTrader 5 accounts that use the hedging system. On netting accounts, buys and sells on the same pair are combined into one net position, so opening 1 lot short while 1 lot long is open closes the position: MT5 hedging vs netting.

Keeping both sides open removes the net exposure, but it can still incur spread, commission and overnight financing costs on each position, depending on the broker and account type.

Example

On a hedging account, 1 lot of EUR/USD long and 1 lot of EUR/USD short are open. As the price moves, one gains what the other loses, but both positions have paid the spread, and if held overnight each can be charged its own swap: long and short positions.