Hedging techniques are popular methods for investors to protect themselves from risky positions; they hedge their bets. It’s like having investment insurance. If a sudden price reversal occurs, the damage gets limited due to the hedge position.
Importers and exporters often employ hedging strategies to protect their businesses against sudden currency movements, potentially affecting their profitability on a transaction.Through their bank or broker, they will use the futures markets to exchange their domestic currency with the counter-party’s currency at a favourable rate. Although the hedging transaction will cost money, it protects the importer or exporter against a severe plunge in their currency’s value.