The Hedging Policy of Your Forex Broker is Something You Should Be Aware Of

Abdulmajidkhs

Well-known member
The Hedging Policy of Your Forex Broker is Something You Should Be Aware Of

The method by which a forex broker decreases market risk exposure by entering into a parallel transaction with another business (a "liquidity provider") is referred to as "hedging."

  Each and every trade entered into by a forex broker's customers exposes the broker to market risk.

  Market risk refers to the possibility of losing money on a trade due to market fluctuations.

  Because your forex broker is always the counterparty to your trades, it has the option of executing or hedging your contracts internally or externally.

  The method by which a forex broker decreases market risk exposure by entering into a parallel transaction with another business (a “liquidity provider”) is referred to as “hedging.”

  The most common hedging approach these days is for a broker to hedge customer exposure on a net basis, rather than hedging every single deal.

  Before any transactions are externally hedged, incoming trades are internalized.

  Before being hedged in the underlying institutional FX market, this hedging policy allows aggregate consumer risk to counterbalance itself.

  · The market risk exposure is neutralized when one client trades in one direction and another trades in the opposite direction.

   When consumers trade in the same direction, still, the broker's market risk increases. Hedging in the underlying market helps to mitigate this risk. The maximum market risk that a forex broker can take is determined by risk limits, which are governed and assessed by the company's overall risk management rules.

  The forex broker makes these hedges by depositing collateral (margin) with a counterparty. (It's similar to posting margin with a forex broker.)

Read the Complete article below:


Notes_220615_164832_eea.jpg
 
Back
Top Bottom