Hedging is a strategy used to protect against potential losses from price changes. Traders take opposite positions to offset risks, reducing exposure to unwanted market movements.
On FNmarkets, traders can hedge by using various financial instruments. For example, if a trader holds a long position in EUR/USD (betting the price will rise), they can hedge by taking a short position in a related asset, like a put option or a futures contract, to protect against price drops.
Scenario: A trader holds a long position of 1 standard lot (100,000 units) of EUR/USD at 1.1000 but is concerned about a possible price decline.
Hedge Action: The trader buys a put option for EUR/USD at a strike price of 1.0950 with an expiration date in three months, costing $200.
If EUR/USD falls: The trader’s long position loses value, but the put option becomes profitable. They can exercise it or sell it for a gain, offsetting the loss from the long position.
If EUR/USD rises: The long position gains, but the put option expires worthless, and the only loss is the $200 paid for the option.
This shows how hedging on FNmarkets can protect against losses while still allowing for potential gains.