How Hedging Strategy works?
For example, at 7:00 GMT you buy Call option on the EUR/JPY currency pair at 137.00 strike with a price of $100 and an expiration at 8.00 GMT the same day. Payment in the case of successful outcome (the price at midnight will be higher than 137.00 for any value) will be 75%, or $75, otherwise you will receive a refund of 10% or $10. At 7:30 GMT the price of EUR/JPY reaches 137.10.Buying of Call or Put option depends on the market situation and on the strategy you use in trading.If you suspect that further progress can be changed in the opposite direction, now is the time to buy a Put option of the same amount and with the same period of expiry at the new strike price. Thus, we are putting the corridor in which, according to our assumption, the price will move.
This action is called one currency pair hedging.Three possible outcomes on the Hedging Strategy. As a result, in this situation, there are three possible outcomes at 8:00 GMT.