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What is foreign exchange proxy hedging and when this technique can be used?

What is foreign exchange proxy hedging and when this technique can be used?

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A forex hedge is a transaction implemented to protect an existing or anticipated position from an unwanted move in exchange rates. Alternatively, a trader or investor who is short a foreign currency pair can protect against upside risk using a forex hedge.A forex trader can make a hedge against a particular currency by using two different currency pairs. For example, you could buy a long position in EUR/USD and a short position in USD/CHF.

The only issue with hedging this way is you are exposed to fluctuations in the Euro (EUR) and the Swiss (CHF).

This Technique is used by Portfolio managers, individual investors, and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging is not as simple as paying an insurance company a fee every year for coverage.

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