What is Hedging in Forex?

Hedging is the technique of opening a “strategic position” to reduce the risk from another position or exposure. To understand the concept better, let’s study an example related to a hedging strategy in the stock market:

• Suppose you bought 100 shares of Company A at ₹1,500.
• You are expecting a favourable announcement of quarterly results, but want to hedge your exposure.
• To hedge, you buy a “Put Option” at a strike of ₹1,480 by paying a premium of ₹20.
• Now, if the share price falls to ₹1,400:
  • Your shares will be at a loss, but 
  • Your Put Option will gain in value.
• In this case, the Intrinsic Value would be ₹80 (₹1,480 – ₹1,400).
• And, “Net Gain” on Put would be ₹60 per share [₹80 – ₹20 (premium)]

In this way, you hedged your market risk and limited your downside while still holding your original position.

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