A hedge is an investment designed to reduce the risk of another investment.

It is a way to reduce business risks while still making a profit on your investments.

Generally, hedging is to conduct two transactions at the same time that are related to the market, opposite in direction, of equal quantity, and with profits and losses offsetting.

Market correlation means that the market supply and demand relationship that affects the price of two commodities is identical. If the supply and demand relationship changes, it will affect the prices of the two commodities at the same time, and the direction of price changes is generally the same.

Opposite direction means that the buying and selling directions of two transactions are opposite, so that no matter which direction the price changes, one will always make a profit and the other will lose.

Hedging is the most common in the foreign exchange market and focuses on avoiding the risks of single-line trading.

Hedge.

The so-called single-line trading means that if you are optimistic about a certain currency, you will go short (or short position), and if you are bearish on a certain currency, you will do short selling (short position).

If the judgment is correct, the profits will naturally be large; but if the judgment is wrong, the losses will also be very large.

The so-called hedging means to buy a foreign currency at the same time as a short position.

In addition, another currency must be sold, that is, short selling.

Theoretically, short buying of a currency and short selling of a currency must have the same denomination to be considered a true hedging order. Otherwise, the hedging function cannot be achieved if the two sides are of different sizes.

Expanded information hedging example 1. In the early 1990s, the Iraq War in the Middle East ended and the United States became the victor. The price of the U.S. dollar also rose steadily with a strong trend. It rose against all foreign currencies. Only the Japanese yen remained a strong currency.

Not long after the fall of the Berlin Wall, Germany had just been reunified, and the poor economy of East Germany was dragging down Germany's economy, causing hidden economic worries.

The political situation in the Soviet Union was unstable and Gorbachev's status was shaken.

The British economy was also in poor condition at that time, and interest rates continued to be cut. The Conservative Party was challenged by the Labor Party, so the pound was also weak.

The Swiss franc became less attractive as a war haven after the war and became a weak currency.

2. In 1997, Soros' Quantum Fund sold a large amount of Thai baht and bought other currencies. The Thai stock market fell, and the Thai government could no longer maintain the linked exchange rate, causing heavy economic losses.

And the fund made big profits.

In addition to Thailand, Hong Kong and other countries and regions that use linked exchange rates to maintain currency prices have all encountered challenges from hedge funds.

The Hong Kong government raised interest rates significantly, with overnight interest rates reaching 300%, and used foreign exchange reserves of HK$120 billion to purchase a large number of Hong Kong stocks.

Finally beat back the speculators.