Today hedging is an important tool to limit the financial risks of any foreign trade business. There are two types of hedging: hedging for a buyer and hedging for a seller. Buyers use hedging to reduce the risks associated with possible increase of the price of goods. Sellers use it to limit the risks associated with possible lowering of prices.
The general principle of hedging is to open a trading position in the Forex market on a specific currency pair in the direction of future operations of conversion of funds. In other words, if the importer buys foreign currency, he must open a trading position to buy in advance, and when the bank purchases the real currency the importer will close the position. Alternatively, the exporter sells foreign currency, so he should open a trading position for sale in advance, and after the actual selling is done he will to close the position.
In order to start trading you need to open a Forex trading account with a legitimate Singapore Forex broker and fund it. eToro or AvaFX Singapore are friendly Forex brokers might be a good choice for you.
Hedging Costs And Fees
With a proper choice of a Singapore Forex broker the hedge costs might be minimal. Mostly they depend on the spread, swap, and commissions for depositing and withdrawing of funds. In other words, you need to choose a Forex Singapore brokerage firm based on its reliability and trading conditions.
Spread – the difference between buy and sell prices of currency pairs. Typically, the major currency pairs such as EUR/USD have only 2-3 pips of spread. Spread is charged only once upon opening or closing a trading position.
Swap is a fee for a rollover of trading positions through the night or the weekend. It can be both negative and positive. Most swaps are low and negative. But again, many Singapore Forex brokers are offering a swap-free service. It is called Islamic trading account. They are ideal for the hedging purposes as well as for other Singapore traders. If your Forex broker gives a positive swap towards the open position, it makes sense to use an account with the swap.
Deposit and withdrawal commissions are standard in most cases. Also do not forget that you can fund your Singapore Forex trading account once, and then trade there as much as necessary, without withdrawing the money after each transaction. Today most of the Forex brokers don’t charge commissions for funding or withdrawing of the money.
As you can see, the hedge costs in a Forex trading account are very low compared with your protection against risks.
The purpose of hedging is not to make profit but to reduce a risk of the potential losses. Properly done hedging allows the company not only to reduce the financial risks, but also to focus on more important aspects of the business.
Today Singapore Forex Currency market (Mustafa Forex) is not only a platform for financial trading, but also a place where you can insure your foreign trade business against the changes of the particular currency rates.