What is a hedge account?

[Pandalook]

What is a hedge account? How do brokers engage in hedging? I’m curious about the practical aspect "

[igillman]

There are several examples of why you would hedge currencies, here is one of them…
You have a company that sells widgets. It costs you $10 (USD) to make a widget and you sell it for $15 in the USA to make a profit. Simple and straightforward so far.
Now imagine you start selling the widget overseas. Now you have to worry about currency conversion rates because although the price you sell the widget for overseas is a fixed value in their currency (EUR, CAN, GBP etc…) due to the currency market fluctuations the amount of USD you get every time you sell a widget varies. So what do you do? On small amounts you just suck it up but on million dollar amounts what you do is to take out a position on the currency markets for GBP/USD or whatever currency you are selling them in. If you do it right then you will find that when the currency conversion rate shifts what you lose on the sale of the widgets you win on the markets or the other way around.
In effect it is a way to cancel out the currency pair movements to leave you with a fixed profit just like you would if you sold your widget for USD without having to change prices every minute or so.

[flamingoproxy]

@Pandalook

What is a hedge account?

it generally refers to an account on which “hedging” (holding simultaneous long and short open positions on the same instrument) has not been disabled by the broker for legal reasons (these vary from country to country, regulator to regulator and even sometimes according to where the account-holder lives, regardless of the brokerage)

@Pandalook

How do brokers engage in hedging?

that’s a different use of the word “hedging,” referring typically to the broker’s laying off of their own net liabilities with an independent liquidity provider - this sometimes happens but far more often not, even when the brokerage claims that it does

@Pandalook

I’m curious about the practical aspect

it’s a hugely controversial issue in this forum

i can’t add to what i said in these posts/threads -

Hedging between two accounts

i don’t hate it as much as not see any possible benefit to it that can’t more easily and efficiently and at lower cost be achieved simply by closing or partially closing the first position instead of opening another it seems to me to be completely unnecessary and to incur additional commission costs without any benefit i can understand i’m happy to change my mind if anyone can answer my question above about what benefit can be achieved through hedging that can’t be achieved more simply by clos…

Hedging between two accounts

what would you gain, by doing that, that you couldn’t have achieved simply by closing the original trade (and paying one commission instead of two)?

< or > for C-Book?

yes, this is right it’s also possible for counterparty brokers effectively to overhedge, and lay off “>100%”, but this is called in the trade “front-running”, not “hedging” - its what happens when they have a consistently profitable customer they’re keeping on because his trades are actually worth their while following with the firm’s money, i.e. very, very rarely indeed!

[ria_rose]

Hellooo! The others have explained it very well already, but I guess if you also want more information on this, you can check this out.

Hedge