Hedge
A business will receive EUR 100,000 and must report its value in USD. It sells that EUR amount forward at 1.1020, agreeing USD 110,200 at maturity. The hedge reduces uncertainty in that matched receipt; if the invoice is cancelled, the forward can become an unmatched obligation.
A defined exposure
Specify what cash flow, price movement or risk factor is to be reduced and over which horizon. A hedge is judged together with that exposure; its standalone loss can be offset by a gain in the underlying cash flow. It need not eliminate all uncertainty or produce a profit by itself.
Match amount and date
Different currencies, sizes, maturities or benchmarks can leave basis risk. Options, forwards and offsetting positions have different rights, premiums and cash requirements. Historical negative correlation alone does not establish a dependable hedge, especially when dependence changes under stress.
Monitor the combined position
Track valuation in a consistent currency and date, settlement obligations, margin and operational requirements. Adjust only under documented rules when the underlying exposure changes. Opening equal long and short CFD tickets can reduce net directional sensitivity while preserving gross positions and costs; it does not erase a loss already incurred.
FAQ
Can a useful hedge lose money?
Yes. Evaluate the hedge and the exposure together rather than require both to profit.
Is every second currency position a hedge?
No. A risk-reduction objective and a justified relationship to the original exposure are needed.
