Devoted to understanding the basics and fundamentals of investing

Historically manufacturers used Foreign Exchange (FX) to hedge or protect their profits earned in other countries.  If I was selling wheat to the and lived in the I would worry that the value of the British Pound (GBP) might devalue before I could repatriate my profits.

Here is how I might hedge my profits.  When I sell my wheat, I become long the GBP (being long means I own GBP).  I am not going to receive my GBP for 90 days it takes to ship the wheat from Minnesota.  At the time of the sale I sell GBP forward 90 days and lock in the exchange rate for my sale.  That way, no matter what happens to the GBP/USD (known in the trade as Cable) exchange rate; I will receive the dollars I planned on when I sold the wheat.

It is possible that the GBP might appreciate against the dollar.  In that case I would have an opportunity loss, but if the GBP depreciated I would be happy.

So hedge away and protect your profits.  And go out and make some new ones.