second rule above is also important. The table below shows the investors account position. Add in the 61 pip cost of the option's premium in the first place, and your total downside is 161 pips, as stated above. To structure this hedge, he buys a gbpusd put option. The strategy relies on the assumption that prices will eventually revert to the mean, yielding a profit. This is done to even out the return profile. This premium goes to the seller of the option (the writer). This is what I call the hedge fund approach. For example, an airline is exposed to fluctuations in fuel prices by the inherent cost of doing business. In the example above an out of the money put option on nzdchf would be bought to limit the downside risk.
If gbpusd falls the value of the forward will rise. All ebooks contain worked examples with clear explanations. The first risk is that the share price falls. You can see from this that the hedging is far from perfect but it does successfully reduce some of the big drops that would have otherwise occurred. Because you are only using virtual funds, there is no risk of an actual cash loss and you can discover how much risk suits you personally. But this expense will be covered by a rise in the value of the underlying, in the example nzdchf.
Secret forex hedging strategy
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