What is the meaning of HEDGE in forex trading?

Answer 1

Hedging is a technique used to limit exposure to or reduce risk for potential circumstances that may negatively impact a financial gain. For example, some airlines use oil futures as a hedge for changes in the price of jet fuel, effectively stabilize the price that they pay for some period of time.
In foreign exchange, the term hedging is most commonly used by companies that conduct business in multiple currencies. Using exchange rate options or simple currency future contracts, these companies will protect a portion of their income (or the cost to spend local currency) once it is converted to the currency used at headquarters.


Please keep in mind that there are costs associated with hedging and that it is very difficult to hedge for all risks.