What is risk hedging in simple words? What is hedging in simple words? Hedging example

The term “hedging” came to us from the English language (from the words hedging, hedge). Literally, the term should be understood as insurance, guarantee.

Risk hedging– a set of measures to avoid financial losses and insure against possible changes in the value of selected assets in the future. Using this instrument, a trader, investor or buyer agrees in advance on a fixed purchase or sale price for a certain asset in the future, thus completely protecting himself from possible negative fluctuations in quotes.

The hedging mechanism itself is as follows: you need to conclude transactions on the market of the asset whose purchase is planned, and on the market of futures instruments (financial derivatives, derivatives) of the same instrument. Risk hedging is most popular when working with assets and goods in global demand, such as metals, grain, and oil products. Hedging is actively used when trading currency pairs and other assets that are in circulation on over-the-counter and exchange markets.

The use of a risk hedging mechanism, on the one hand, guarantees the buyer or investor insurance protection against possible troubles, but, on the other hand, such confidence must be paid for with part of the profit. In fact, hedging is very similar to classical types of insurance - for the opportunity to rely on insurance protection, the policyholder is obliged to pay an insurance premium.

Risk hedging instruments

The main hedging instruments are financial derivatives, that is, futures exchange contracts (futures and options).

Option– a financial instrument that allows you to fix your right to buy or sell a certain asset in the future at a pre-fixed price.

Futures– a financial instrument that allows you to record obligations to buy or sell an asset in the future at an agreed price.

These hedging instruments can be used either separately or simultaneously. Most often, tools are usually combined individually for each case, and the number of combinations is quite large.

Example one

An investor buys shares of a company with the expectation that the value of the shares will increase in the near future. At the same time, there is a possibility that the shares will fall in price. The investor decides to insure against possible unfavorable developments and hedges his risks by purchasing a put option to sell shares, for example, at the purchase price for the entire planned investment period. If the shares actually rise in price, then the investor will not exercise the option, but if the shares lose value, then the option will allow the securities to be sold without loss. Of course, in addition to the premium for the option itself.

Example two

The buyer is interested in purchasing grain from a crop that has not yet grown. To insure against the risks of rising prices (possible low yields), he enters into a futures contract with a grain supplier, which fixes the future transaction price. At the same time, the buyer hedges his risks and wants to insure against purchasing grain at an inflated price (possible excess yield), because the future already implies an obligation to complete the transaction in any case. The buyer purchases a put option to sell a batch of grain at the same price. If, by the time of the transaction, market prices for grain crops are higher than the futures price, the buyer will make good money. If prices fall, the buyer will fulfill the obligation under the futures (buy the batch), but then, by right of option, will sell the batch at the same price at which he purchased it, without losing anything. After this, the buyer purchases the volume of grain he needs at the current market value, which is lower, but he still has some free cash left.

The above examples clearly indicate that competent risk hedging allows you to completely protect your investments from financial losses in any development of the situation. For such an opportunity you will have to pay the cost of the futures and/or options.

Methods and methods for hedging risks

1. Pure hedging (classic hedging method)– this protection is based on the simultaneous opening of opposite positions both in the market of the required asset and in the market for futures instruments.

For example, simultaneously with opening a transaction to purchase securities, you should buy an option to sell them in a constant volume at the same cost.

Pure hedging guarantees the complete safety of the trader’s or investor’s capital in cases where quotes move in a negative direction.

2. Full and partial hedging. A trader or investor has the opportunity to save on insurance - only part of the transaction volume can be hedged. In this case, the investor pays less for the future or option. If the likelihood of a negative change in the value of assets is minimal, it is most advisable to use partial hedging. In cases where the risks are high, it is not worth skimping; the transaction must be hedged in full, remembering the folk wisdom about “the miser who pays twice.”

Example - an investor sells 100 thousand euros for dollars, expecting a depreciation of the European currency against the dollar. Since he considers the probability of such a development of events to be quite high, he chooses partial hedging to insure his risks and buys a call option for half the transaction amount (50 thousand euros). With an option cost of 2%, the investor’s savings will be 1,000 euros, but his risks will increase, since insurance coverage only applies to half of the transaction amount.

3. Anticipatory hedging– a method in which transactions in the futures contracts market are concluded earlier than transactions in the real assets market. This hedging method uses futures, which are essentially analogues of typical delivery contracts. They can be used on a par with delivery and settlement (non-deliverable) futures.

As an example, consider the following situation: an investor plans to buy shares in the future, but there is a risk that these shares will increase in price. A trader cannot buy them right away, for example, because he does not yet have sufficient capital. The investor enters into a futures contract for a future purchase at a fixed price, thereby using an anticipatory hedging instrument.

4. Selective defense– this method of hedging is characterized by the conclusion of transactions in the futures market and in the market of the underlying asset that differ in time and volume.

For example, an investor in May purchases 100 shares of a company, which he plans to sell in September, and in July he opens an option for 200 shares (the expiration date of this option is December). Some personal interests led him to this decision.

Selective hedging is only suitable for experienced stock speculators.

5. Cross hedging– in this method of protection, the underlying asset is different from the asset of the futures contract.

Example: a trader sells oil and at the same time enters into an option to buy gold, again, out of personal preferences and considerations. This method is used by professional market players.

Any transactions on the stock exchange (and over-the-counter markets) are always associated with a certain amount of risk. Hedging is a great way to protect your capital from market fluctuations; it allows you to protect the player as much as possible from possible losses. Modern protection instruments (options and futures) allow you to successfully hedge transactions.

In modern economic terminology you can find many beautiful, but incomprehensible words. For example, “hedging”. What is this? Not everyone can answer this question in simple words. However, upon closer examination, it turns out that this term can be used to define insurance of market transactions, albeit in a slightly specific manner.

Hedging - what is it in simple words

So, let's figure it out. This word came to us from England (hedge) and in direct translation means a fence, a fence, and as a verb it is used in the meaning of “to defend”, that is, to try to reduce possible losses or avoid them altogether. What is hedging in the modern world? We can say that this is an agreement between the seller and the buyer that in the future the terms of the transaction will not change, and the product will be sold at a certain (fixed) price. Thus, knowing in advance the exact price at which the goods will be purchased, the parties to the transaction insure their risks against possible fluctuations in exchange rates and, as a consequence, changes in the goods. Market participants who hedge transactions, that is, insure their risks, are called hedgers.

How it happens

If it's still not very clear, you can try to simplify it even more. The easiest way to understand what hedging is is with a small example. As you know, the price of agricultural products in any country depends, among other things, on weather conditions and how good the harvest will be. Therefore, when conducting a sowing campaign, it is very difficult to predict what the price of products will be in the fall. If the weather conditions are favorable, there will be a lot of grain, then the price will not be too high, but if there is a drought or, conversely, too frequent rains, then some of the crops may die, which is why the cost of grain will increase many times over.

To protect themselves from the vagaries of nature, regular partners can enter into a special agreement, fixing a certain price in it, guided by the market situation at the time the contract is concluded. Based on the terms of the transaction, the farmer will be obliged to sell and the client to buy the crop at the price specified in the contract, regardless of what price appears on the market at the moment.

This is where the moment comes when it becomes most clear what hedging is. In this case, several options for the development of the situation are possible:

the price of the crop on the market is more expensive than that specified in the contract - in this case, the producer, of course, is dissatisfied, because he could get more benefits;
the market price is less than that specified in the contract - in this case, the buyer is the loser, because he incurs additional costs;
the price indicated in the contract is at the market level - in such a situation, both are happy.

It turns out that hedging is an example of how you can profitably realize your assets even before they appear. However, such positioning still does not exclude the possibility of a loss.

Methods and goals, currency hedge

On the other hand, we can say that risk hedging is insurance against various unfavorable changes in the foreign exchange market, minimizing losses associated with exchange rate fluctuations. That is, not only a specific product can be hedged, but also financial assets, both existing and planned for acquisition.

It is also worth saying that proper currency hedging does not aim to obtain the maximum, as it may seem at first. Its main task is to minimize risks, while many companies deliberately refuse an additional chance to quickly increase their capital: an exporter, for example, could play on a depreciation, and a manufacturer could play on an increase in the market value of a product. But common sense dictates that it is much better to lose excess profits than to lose everything altogether.

There are 3 main ways to maintain your foreign exchange reserve:

Application of contracts (terms) for the purchase of currency. In this case, exchange rate fluctuations will not affect your losses in any way, nor will they generate income. The purchase of currency will occur strictly according to the terms of the contract.
Introducing protective clauses into the contract. Such clauses are usually bilateral and mean that if the exchange rate changes at the time of the transaction, probable losses, as well as benefits, are divided equally between the parties to the contract. Sometimes, however, it happens that protective clauses concern only one party, then the other remains unprotected, and currency hedging is recognized as unilateral.
Variations with bank interest. For example, if in 3 months you need currency for payments, and there are assumptions that the rate will change upward, it would be logical to exchange money at the existing rate and put it on deposit. Most likely, the bank interest on the deposit will help level out exchange rate fluctuations, and if the forecast does not come true, there will be a chance to even earn a little money.

Thus, we can say that hedging is an example of how your deposits are protected from likely fluctuations in interest rates.

Methods and tools

Most often, the same operating techniques are used by both hedgers and ordinary speculators, but these two concepts should not be confused.

Before we talk about various instruments, it should be noted that understanding the question “what is hedging” lies primarily in the purposes of the operation being carried out, and not in the means used. Thus, a hedger conducts a transaction in order to reduce the probable risk from changes in the value of a commodity, while a speculator quite consciously takes such a risk, while expecting to receive only a favorable result.

Probably the most difficult task is the correct choice of hedging instrument, which can be divided into 2 large categories:

over-the-counter, represented by swaps and forward contracts; such transactions are concluded between the parties directly or through the mediation of a specialist dealer;
exchange-traded hedging instruments, which include options and futures; in this case, trading takes place on special platforms - exchanges, and any transaction concluded there ultimately turns out to be tripartite; the third party is the Clearing House of a particular exchange, which is the guarantor of the parties to the agreement fulfilling their obligations;

Both methods of hedging risks have both their advantages and disadvantages. Let's talk about them in more detail.

Exchange

The main requirement for goods on the exchange is the ability to standardize them. These can be either food products: sugar, meat, cocoa, etc., or industrial products - gas, precious metals, oil, etc.

The main advantages of stock trading are:

maximum accessibility - in our age of advanced technology, trading on the stock exchange can be carried out from almost any corner of the planet;
significant liquidity - you can open and close trading positions at any time at your discretion;
reliability - it is ensured by the presence in each transaction of the interests of the exchange clearing house, which acts as a guarantor;
fairly low transaction costs.

Of course, there are some drawbacks - perhaps the most important are the rather strict restrictions on the terms of trade: the type of goods, their quantity, delivery times, and so on - everything is under control.

OTC

Such requirements are almost completely absent if you trade independently or with the participation of a dealer. Over-the-counter trading takes into account the client’s wishes as much as possible; you yourself can control the volume of the batch and delivery time - perhaps this is the biggest, but practically the only plus.

Now about the disadvantages. There are, as you understand, much more:

difficulties with selecting a counterparty - you will now have to deal with this issue yourself;
high risk of failure of any party to fulfill its obligations - there is no guarantee in the form of the exchange administration in this case;
low liquidity - if you terminate a previously concluded transaction, you face significant financial costs;
considerable overhead costs;
long duration - some hedging methods may cover periods of several years, since variation margin requirements do not apply.

In order not to make a mistake when choosing a hedging instrument, it is necessary to conduct the most complete analysis of the likely prospects and features of a particular method. In this case, it is necessary to take into account the economic characteristics and prospects of the industry, as well as many other factors. Now let's take a closer look at the most popular hedging instruments.

Forward

This concept denotes a transaction that has a certain period, in which the parties agree on the delivery of a specific product (financial asset) on a certain agreed date in the future, while the price of the product is fixed at the time of the transaction. What does this mean in practice?

For example, a certain company plans to purchase eurocurrency from a bank for dollars, but not on the day the contract is signed, but, say, after 2 months. In this case, it is immediately recorded that the exchange rate is $1.2 per euro. If after two months the dollar to euro exchange rate is 1.3, then the company will receive tangible savings - 10 cents on the dollar, which, with a contract value of, for example, a million, will help save $100 thousand. If during this time the rate falls to 1.1, the same amount will go to a loss for the company, and it is no longer possible to cancel the transaction, since the forward contract is an obligation.

Moreover, there are several more unpleasant moments:

since such an agreement is not secured by the clearing house of the exchange, one of the parties can simply refuse to execute it if unfavorable conditions arise for it;
such a contract is based on mutual trust, which significantly narrows the circle of potential partners;
If a forward contract is concluded with the participation of a certain intermediary (dealer), then costs, overheads and commissions increase significantly.

Futures

Such a transaction means that the investor undertakes to buy (sell) a specified amount of goods or financial assets - shares, other securities - at a fixed base price after some time. Simply put, it is a contract for future delivery, but a futures is an exchange-traded product, which means its parameters are standardized.

Hedging freezes the price of future delivery of an asset (commodity), and if the spot price (the selling price of a product in the real market, for real money and subject to immediate delivery) decreases, then the lost profit is compensated by the profit from the sale of futures contracts. On the other hand, there is no way to use the rise in spot prices; the additional profit in this case will be offset by losses from the sale of futures.

Another disadvantage of futures hedging is the need to introduce a variation margin, which maintains open futures positions in working order, so to speak, is a kind of guarantee. If the spot price rises rapidly, you may need additional financial injections.

In some ways, hedging futures is very similar to ordinary speculation, but there are differences, and very fundamental ones.

The hedger, using futures transactions, insures with them those operations that it conducts on the market of real (real) goods. For a speculator, a futures contract is just an opportunity to generate income. Here the game is played on the difference in prices, and not on the purchase and sale of an asset, because a real product does not exist in nature. Therefore, all losses or gains of a speculator in the futures market are nothing more than the end result of his operations.

Insurance with options

One of the most popular tools for influencing the risk component of contracts is option hedging; let’s talk about them in more detail:

Option type put:

the holder of the put type has the full right (however, not the obligation) to exercise the futures contract at a fixed option exercise price at any time;
By purchasing such an option, the seller of a commodity asset fixes the minimum sale price, while retaining the right to take advantage of a favorable price change;
when the futures price falls below the cost of exercising the option, the owner sells it (exercises), thereby compensating for losses in the real market;
if the price increases, he may refuse to exercise the option and sell the goods at the most favorable price for himself.

The main difference from futures is the fact that when purchasing an option, a certain premium is provided, which expires in case of refusal to exercise. Thus, the put option can be compared with the traditional insurance we are familiar with - in the event of an unfavorable development of events (an insured event), the option holder receives a premium, and under normal conditions it disappears.

Call type option:

the holder of such an option has the right (but is not obligated) to purchase a futures contract at any time at a fixed exercise price, that is, if the futures price is greater than the fixed price, the option can be exercised;
For the seller, the opposite is true - for the premium received when selling the option, he undertakes to sell the futures contract at the strike price upon the first request of the buyer.

In this case, there is a certain guarantee deposit, similar to that used in futures transactions (sale of futures). A feature of a call option is that it compensates for a decrease in the value of a commodity asset by an amount not exceeding the premium received by the seller.

Hedging types and strategies

Speaking about this type of risk insurance, it is worth understanding that since there are at least two parties to any trading operation, the types of hedging can be divided into:

investor's (buyer's) hedge;
supplier's (seller's) hedge.

The first is necessary to reduce investor risks associated with a likely increase in the cost of the proposed purchase. In this case, the best options for hedging price fluctuations would be:

selling a put option;
purchasing a futures contract or call option.

In the second case, the situation is diametrically opposite - the seller needs to protect himself from a fall in the market price of the product. Accordingly, the hedging methods here will be reversed:

futures sales;
buying a put option;
selling a call option.

A strategy should be understood as a certain set of certain tools and the correctness of their use to achieve the desired result. As a rule, all hedging strategies are based on the fact that both the futures and spot prices of a commodity change almost in parallel. This makes it possible to compensate for losses incurred from the sale of real goods.

The difference between the price determined by the counterparty for the actual commodity and the price of the futures contract is taken as the “basis”. Its real value is determined by such parameters as the difference in the quality of goods, the real level of interest rates, the cost and storage conditions of the goods. If storage involves additional costs, the basis will be positive (oil, gas, non-ferrous metals), and in cases where possession of the goods before its transfer to the buyer brings additional income (for example, precious metals), it will become negative. It is worth understanding that its value is not constant and most often decreases as the term of the futures contract approaches. However, if there is suddenly an increased (hype) demand for a real product, the market may move into a state where real prices become much higher than futures prices.

Thus, in practice, even the best strategy does not always work - there are real risks associated with sudden changes in the “basis”, which are almost impossible to mitigate using hedging.

The relevance of the topic is determined by the need to reduce high financial risks for financial market participants that arise as a result of strong volatility in asset prices. Hedging can be a solution to this problem.

Financial markets- a complex, unstable high-tech environment, changes in which and the likelihood of these changes sometimes arise at the most unexpected moment. Risk expresses the probability of the occurrence of any adverse event or its consequences, leading to direct losses or indirect damage. Internal factors represent a set of managerial characteristics of risk management. Management bears full responsibility for the amount of risk assumed by the bank, their objective assessment and the amount of probable losses. As you know, financial transactions have varying degrees of risk. Options are a ubiquitous form of contract. An option gives the right to buy or sell something at a fixed price in the future. Purchasing an option to reduce price risk is insurance against losses associated with an increase in the price of an asset. An options contract should be distinguished from a forward contract, which contains an obligation to buy or sell something in the future at a fixed price.

Options- extremely flexible derivative securities that provide enormous additional opportunities for investors pursuing a variety of goals. Options allow speculators to obtain the maximum possible financial leverage, while conservative investors can hedge their portfolio and control investment risk.

The purpose of the work is to study the use of options for hedging portfolio risks.

In accordance with the goal, the following tasks are set in the work:

consider the theoretical aspects of the use of options for hedging portfolio risks, including the essence and concept of an option and hedging;
Research option hedging strategies, including hedging techniques.

CHAPTER 1. THEORETICAL BASIS OF HEDGING

1.1. Concept, essence and hedging instruments

Hedging is any opening of positions aimed at insuring other already existing open positions. Hedging can be either an independent combination or part of another strategy.

Hedger is a person or company that eliminates risk by temporarily taking a position in one market and an opposing position in another but economically related market.

One way to minimize the likelihood of losses is hedging.

In a general sense, hedging is a set of operations with derivatives instruments (forwards, futures and options, etc.), the purpose of which is to reduce the impact of market risks on the final result of a company’s activities.

The hedged asset can be a commodity or a financial asset that is available or planned to be acquired. In the case of insuring a bank against currency risk, this asset will be currency.

We should not forget that hedging not only protects against losses, but also reduces the bank’s ability to take advantage of favorable developments in the environment. However, for most companies, a well-structured hedging scheme can bring additional benefits at low cost, and in some cases, profit over a long period of time.

Exchange-traded risk insurance instruments mean futures and options, which are traded on specialized trading platforms. The basis of their existence is future uncertainty. High market liquidity, reliability, accessibility and relatively low transaction costs make these instruments especially attractive.

Hedging operations are understood as operations with financial instruments of futures transactions performed in order to compensate for possible losses arising as a result of an unfavorable change in the price or other indicator of the hedged item. The hedged item may be assets and (or) liabilities, cash flows associated with the above assets and (or) liabilities, or expected transactions.

Hedging means "fencing". In other words, this is the process of “fencing off” financial risks.

The “rural” origin of this term is explained by the fact that in modern history the first large-scale users of hedging were American farmers, they used it to insure at the beginning of the planting season against fluctuations in grain prices after harvest.

Insurance - the closest semantic equivalent of the word “hedging”. It serves as a means of protection for the buyer against unfavorable circumstances. To determine the price for this type of insurance, the insurance company analyzes past behavior statistics and future forecasts in this area. The less likely the occurrence of this problem, the lower the price of the insurance policy. It also changes depending on the ratio of supply and demand for a given product and on the reputation of the seller. That is, the price is determined by both factors related to the essence of the product and market factors.

Options and other derivatives provide unique opportunities to limit the impact of market price fluctuations on the activities of producers and consumers. As in other life situations, the cost of hedging is adequate to the value of the service. Just as no one will sell cheap life insurance to a person aged 120, no one will sell cheap hedges when the market situation is critical. But just as people at the age of 20 do not buy a life insurance policy due to the relative high cost and not an obvious need, users do not like to pay for a hedge in a calm market situation, considering it as an additional loss.

Hedges are not cheap, but they ensure business stability; only enterprises that have learned from bitter experience use them.

A hedger differs from a speculator in that he is not prepared to take on risk.. The hedger's priority is to reduce risks. At the same time, hedging is not mandatory: some corporations not only do not hedge risks, but even speculate in the markets. Others view any market risk as a danger and mechanically hedge it. There are those who never hedge and treat unexpected gains and losses as “divine will.”

When deciding to hedge, its objectives are determined. For example, protecting budgeted indicators (oil prices, interest payments on debts, currency exchange rates, etc.), insuring “catastrophic scenarios” or, in the case of investors, separating primary risks from associated ones.

After selecting the target, we move on to considering the main hedging instruments. As a rule, this is the use of forwards or options, or a combination of both.

There are long and short hedges. A long hedge protects against rising prices, while a short hedge protects against falling prices. Long hedge - buying an option as insurance, protecting open positions from losses if prices rise. The strategy is used by investors who have shorted shares to hedge against increases in the stock's market value.

Example of a long hedge: Assume a short position by selling 100 shares. We are at risk of loss if stock prices rise, so we bought a call option. If stock prices rise, the call option will also rise in price, protecting us from losses.

Short hedge- buying an option as insurance, protecting open positions from losses in the event of a price decline. The strategy is used by investors to hedge long positions against a fall in the market value of shares.

Example of a short hedge: Let's say we have 100 shares. Having learned about the unpleasant news associated with them, we analyze the possibility of reducing their market value. To protect ourselves from this, we can either buy a put option or sell a call option. Both of these positions hedge 100 of our shares. A put option creates an insurance policy of unlimited size, while a call option hedges only a number of price points equal to the premium received for selling the option.

Long hedges protect investors by covering their short positions in case of rising prices; The original and hedged positions cancel each other out so that unexpected price changes occur in concert across both positions. Short hedges are the opposite of long hedges; they protect investors from falling prices.

Hedges can be modified so that they serve to increase possible winnings or minimize the risk of losses. A reverse hedge is an extension of a long or short hedge in which more options are opened than are required to cover stock positions. This increases the potential profit on option positions in the event of an unfavorable movement in the market value of the underlying stock.

Reverse hedge creates more protection than a hedge that simply covers a position. For example, if we are short 100 shares, we only need one call option to hedge that position. But with a reverse hedge, we can buy more than one call option, giving us both position protection and a new income opportunity. This possibility is due to the fact that premium growth will outpace unfavorable changes in stock price (2 points of gain for every point of change in stock in the case of two call options, if there are three options, then the ratio will be 3 to 1, etc.).

The main hedging instruments are futures, forwards, options and swaps, each of which is used depending on the purpose of the hedge.

Futures (futures contract) is an agreement to fix the conditions for the purchase or sale of a standard quantity of a certain asset at a specified date in the future, at a price set today.

Forward (forward contract)- an agreement (derivative financial instrument) under which one party (the seller) undertakes to transfer the goods (the underlying asset) to the other party (the buyer) or to fulfill an alternative monetary obligation within the period specified by the contract, and (or) ) under the terms of which the parties have counter monetary obligations in an amount depending on the value of the underlying asset at the time of fulfillment of obligations, in the manner and within the period or within the period established by the agreement.

Options- These are contracts that give the right, but not the obligation, to buy or sell a certain asset at a certain price within a certain time frame. The use of options for hedging risks is discussed in more detail in the second chapter.

SWAP operation (Swap, Rolover, Overnight) on Forex— represents the simultaneous conclusion of two opposite transactions with different value dates, one of which closes an already open position, and the other immediately opens it. The swap rate and the cost of the swap are determined at the time the transaction is concluded. The purpose of the operation is usually to extend an open position.

The choice of the class of instrument to be used for hedging is primary to the choice of a specific instrument, a specific series or issue. It is determined by the complexity, flexibility and cost requirements that the manager places on the hedging instrument.

1.2. Basic methods of hedging transactions in financial markets

1. Hedging with futures contracts

Forwards and futures are the simplest types of forward transactions used for hedging. Hedging with futures allows you to fix “today” the price of an asset, currency exchange rate or interest rate at which the contract will be executed “in a period.”

The futures market is an exchange, which means more liquid and free from credit risk. The counterparty of each trader on the exchange is the Exchange Clearing House, with which it is possible to conclude both “short” and “long” transactions thanks to the margin trading system.

In accordance with the requirements of the exchange, when opening a position, an initial margin is paid in the form of money or securities. Subsequently, the futures position is revalued every business day, and the difference between the current futures price and the position's par value is added (with a plus or minus sign) to the amount of the deposited margin. If the calculated margin amount is less than the original amount, a notification is sent to the account owner (called a margin call) that if the difference is not cleared by the end of the current business day, the Clearing House will force the position to be closed. The position can also be liquidated by the owner himself at any time through an “off-set deal”. In this case, the underlying instrument is not delivered, but instead a differential income is paid.

Differential income is defined as the income that would be received by delivering at the price fixed by the futures contract and simultaneously closing the position with an opposite transaction at current spot prices.

Some futures contracts (mostly securities) provide for delivery of the underlying asset if the position is not closed up to and including the last trading day. However, the client can refuse this opportunity even upon receipt of delivery notification, which ultimately gives futures the status of settlement financial instruments.

Thus, the parties enter into an agreement not for the purpose of purchasing goods, but primarily to redistribute the risks associated with changes in prices for goods. A futures contract allows risk to be transferred from producers, distributors of commodities and others (hedgers) to those willing to accept it (speculators).

There is a distinction between hedging by buying and selling futures.

Hedging by purchase(buyer's hedge, long hedge) is associated with the purchase of a futures contract, which provides the buyer with insurance against possible price increases in the future.

When hedging with a sale(seller's hedge, short hedge) it is intended to sell real goods on the market, and in order to insure against a possible price decline in the future, the sale of futures instruments is carried out.

Full hedging involves insuring risks on the futures market for the full amount of the transaction. This type of futures hedging completely eliminates possible losses associated with price risks. Partial hedging only insures part of the actual transaction.

With the help of futures, two types of hedging can be carried out: hedging an existing position on the underlying asset and hedging the future value of the asset, if transactions on it are only planned to be carried out. You can list such types of futures as futures for the purchase of currencies, securities, futures for stock indices and interest rates. The buyer of the futures undertakes the obligation to buy at the contract price (rate) or, in the case of interest rate futures, to borrow at the specified rate. The seller, accordingly, is conditionally obliged to sell or lend.

The main advantages of using futures contracts for hedging purposes are:

No capital investment. The amount of funds diverted (that is, margin) is minimal.
High correlation of price sensitivity with the underlying asset - and often not only the underlying asset. After all, futures for securities offer the delivery of several instruments related to the underlying one. In addition, the practice of “cross” hedging is widespread - that is, hedging one asset with a futures contract for another asset. For example, ten-year Bundesbank bonds are successfully insured by Eurodollar futures or swap notes.
Standardization. Thanks to standardization, as well as, as a rule, only four possible delivery months (March, June, September, December), almost unlimited liquidity is achieved on large exchanges.

Disadvantages can be recognized:

The basis risk that arises when hedging the current portfolio. For example, it would be reasonable to hedge a 6-month T-bill position with a 6-month T-bill future. However, three months later, a situation arises where, in essence, the three-month bill is still hedged by the six-month paper futures. Such a hedge is no longer optimal: the gap in price sensitivity widens over time.
Standardization. Oddly enough, this property of futures also has a downside. After all, standardization eliminates flexibility, and hedging with futures is never ideal, that is, completely satisfying the urgency and volume of the underlying asset. However, this disadvantage goes away if hedging is done with forward contracts.

2. Hedging with forward contracts

Hedging with forward contracts has its own characteristics. The types of forwards and futures are the same, as are their main characteristics.

However, since the conclusion of forward contracts is individual in nature, all essential conditions (underlying asset, transaction volume, term, price) are determined by agreement of the parties. In other words, an economic entity can enter into a forward with its counterparty for any asset, any amount and any period.

Accordingly, when hedging with forward contracts, it is usually not possible to change persons without the consent of the counterparty, so it is impossible to carry out a transaction similar to an exchange offset, where the consent of the other party is not required. A forward contract does not provide for settlements through the transfer of variation margin and does not require the involvement of a clearing organization.

3. Hedging with swap

OTC hedging instruments— these are, first of all, forward contracts and commodity swaps. These types of transactions are concluded directly between counterparties or through the mediation of a dealer (for example, a swap dealer).

Since the mid-70s of the XX century. Swap transactions (SWAP) have become widespread in the US financial markets.

A swap contract is defined as an agreement between parties to exchange payments of money based on different interest rates, stock exchange quotations, or prices calculated on the basis of a monetary amount fixed in the contract.

In general terms, a swap hedging can be thought of as a portfolio of forwards or futures contracts entered into between two parties.

Swap is used to perform arbitrage operations, but this is not the main direction. Much more often it is used for insurance against various types of risks. This may be a change in the interest rate (interest rate swap, currency swap), and unfavorable dynamics of the exchange rate (currency swap), and fluctuations in commodity prices (commodity swap), and risk strategies in the securities market (stock swap). Swaps allow different categories of financial market participants to exchange risks, paying off the most unfavorable effects for themselves. In particular, banks use swaps to optimize interest flows on assets and liabilities, for greater flexibility in loan and bond portfolios. As a rule, swaps are sufficiently liquid and diverse only for maturities within one calendar year.

Currently, swaps are usually arranged by financial intermediaries, who often enter into an agreement with one company and then seek another company to enter into an offset swap. Swaps are concluded on the over-the-counter market, so financial intermediaries provide guarantee of their execution for the participating companies.

An intermediary is usually involved in cases where it is difficult to find a counterparty with similar interests. Such a transaction allows the aluminum producer to hedge against the consequences of a price decrease with a swap, and the consumer to prevent the adverse consequences associated with an increase in price. Typically, hedging with a swap involves concluding two separate contracts.

Under the first contract, the bank undertakes to transfer to the seller fixed amounts for a certain amount of aluminum throughout the entire term of the contract, while the seller must transfer to the bank amounts based on a floating rate (using, for example, a commodity index). As a result, the manufacturer sells aluminum at a fixed price during the entire term of the contract and prevents the negative consequences associated with a decrease in price, and the bank protects its interests from price changes by concluding a second contract with the consumer. If the price of aluminum increases, the difference between the increased and fixed prices is transferred to the bank for providing guarantees for the sale of goods at a fixed price.

By virtue of the second contract, the buyer agrees to pay the bank fixed payments for established quantities of aluminum, and the bank is obliged to transfer payments to the consumer based on a changing rate. This legal arrangement between the parties allows the bank to “close out” its position in making payments based on a changing rate. The buyer, in turn, protects himself from the consequences of rising aluminum prices. In the event of a price reduction, the benefit that the consumer would have received is transferred to the bank for the provision of services.

Often swap contracts contain a provision that no actual delivery of the commodity takes place; the parties transfer to each other the difference between a fixed price and a price based on a variable rate.

However, if a manufacturer or consumer needs to sell or purchase aluminum, they make transactions on the cash market for the product.

The adverse consequences that may arise due to price fluctuations in the cash market are smoothed out by payments under the swap contract. Thus, a producer who sells aluminum at a lower price on the spot commodity market than that fixed in the swap agreement receives from the bank the difference between the fixed price and the price based on a variable rate. If the price increases, the manufacturer pays the difference to the bank. Conversely, if the buyer purchases aluminum at a higher price on the spot market, then he receives the difference from the bank under the swap contract. If the price on the cash market decreases, the consumer pays the difference to the bank.

From the above example it follows that hedging with a swap is aimed at insuring against the risks of both parties. However, it is possible for speculators to enter into swap agreements. Their attraction to the market can help increase market volume and significantly increase liquidity.

4. Hedging currency risks

Currency hedging(hedging currency risks) is the conclusion of forward transactions for the purchase or sale of foreign currency in order to avoid price fluctuations.

Hedging of currency risks consists of purchasing (selling) currency contracts for a period simultaneously with the sale (purchase) of currency available, with the same delivery period, and conducting a reverse transaction when the actual delivery date of the currency arrives. Currency hedging is usually understood as protecting funds from unfavorable movements in exchange rates, which consists of fixing the current value of these funds by concluding transactions on the foreign exchange market (the interbank forex market or the currency exchange).

5. Hedging of securities (shares)

As in the cases of hedging currency risks or hedging bonds, when hedging securities (shares) the basic principle remains - the loss of price in one of the markets is compensated by the profit received in the other market.

It is necessary to take into account that the difference between futures and spot (current stock price) prices still exists. This difference is called the basis. The current futures price of a stock may be greater or less than the current spot price of a stock, so the overall hedging result depends on the difference between the two bases and can be calculated using the formula:

Result = S 0 + (Base 0 - Base 1), where:

S 0— spot price (share price) at the beginning of the hedging operation;

Basis 0— the difference between futures and spot prices at the beginning of the transaction;

Basis 1— the difference between futures and spot prices on the transaction completion date.

6. Hedging bond portfolios

Let's say an investor holds his funds in bonds and wants losses from a possible fall in their prices in the future. In this case, he can sell bond futures. This operation has a number of advantages over the direct sale of bonds at the current price:

Possibility of hedging any portfolio of ruble bonds
Minimal losses on spreads and market movements (constant narrow spread in the order book)
Low exchange commissions, no deposit fees

There are a number of methods for hedging bond portfolios.

When hedging an underlying asset with a futures contract, it is possible to offset 100% of the losses from rising interest rates (and the corresponding fall in bond prices) on that issue.
When hedging with bond futures of another issue, you can hedge against a parallel upward shift in the yield curve.
When hedging a bond portfolio with futures, the portfolio can be insured against the adverse effects of general market factors.

CHAPTER 2. OPTIONAL HEDGING STRATEGIES

2.1. Concept and types of options

Option (from Latin optio - choice, desire, discretion) - the right to choose, obtained for a fee. The term is most often used in the following meanings:

a) the right granted to one of the contracting parties by the terms of the contract to choose the method, form, scope of fulfillment of the obligation it has accepted, or even to refuse to fulfill the obligation if circumstances arising under the contract arise;

b) an agreement giving one of the parties concluding an exchange purchase and sale transaction the right to choose between alternative (variant) terms of the contract, in particular the right to buy or sell securities in a predetermined volume at a fixed price for a given period;

c) the right to buy new securities of the issuer on pre-agreed terms;

d) the right to an additional quota when issuing securities;

e) preliminary agreement on concluding a future contract within a specified time frame.

In the investing world, an option is a contract between two people whereby one person gives the other the right to buy a certain asset at a certain price within a certain period of time or gives the other the right to sell a certain asset at a certain price within a certain period of time. The person who received the option and thus made the decision is called the option buyer, who must pay for this right. The person who sold the option and who responds to the buyer's decision is called the seller of the option.

The right represented by an option has some general limitations. Such a right cannot be granted for an indefinite period; it exists only for a few months. When the option's specified expiration date expires, it becomes worthless. Therefore, as a rule, the value of the option gradually decreases as it approaches expiration. In addition, each option is associated with a certain number of shares, namely 100 shares. When trading stocks, a well-established tradition is usually implemented - they are traded not individually, but in blocks (called lots). Such a lot usually contains a number of shares in multiples of 100. This is a standard trading unit in exchange trading. Of course, everyone has the right to buy any other number of shares on the market, but for buying less than 100 shares you will have to pay higher commissions.

There are two types of options.

The first type is “call”, giving its owner the right to purchase one hundred shares of the company on which the option was written. Each option uniquely determines the shares of a particular company and their price for the period from now to the future date specified in the option. By purchasing a call option, we will be able to buy 100 shares of a certain company at a certain price per share at any time from today until a certain day in the future. For presenting this opportunity, the seller expects to receive a certain reward from the buyer. This reward (the price of the option) is determined by how profitable the opportunity implied by the option is. If the price per share fixed in the option appears to be relatively more profitable (based on the current price of these shares), then the value of the option will be higher. The value of each option changes in accordance with fluctuations in stock exchange prices. If the stock price increases, then the value of the call option will increase. If stock prices decline, the value of the call option begins to fall. If an investor buys a call option and the market value of the underlying stock then rises, he can make a profit. A call option becomes more valuable as the stock rises. Thus, the value of the option is directly related to the value of the stock.

The second type of option is called a put option.. This is a contract that gives its owner the right to sell one hundred shares of a certain company in the future. By purchasing a put option, we can sell 100 shares of a certain company at a certain price per share at any time from today until a certain day in the future. For presenting this opportunity, the seller expects to receive a certain reward from the buyer.

The buyer of a call option hopes that the price of the underlying stock will rise. If this happens, the call option becomes more valuable. The buyer of a put option hopes for exactly the opposite, believing that the price of the stock will fall. And if this happens, then the put option becomes more valuable. Call and put options are opposites of each other, and those who invest in them have opposite expectations about the future movement of prices on the stock exchange.

If the buyer of an option, whether a call or a put, is correct about the future movement of the stock's market price, he will make a profit. But when it comes to options, one important factor must not be forgotten: the change in stock price must occur before the expiration date of each option. Unlike stocks, which can be held as long as you like, or bonds, which pay out on a specific day, an option will cease to exist and lose all its value after a fairly short period of time. Therefore, time is the determining factor in whether an investor will make a profit or lose money.

2.2. Using options for hedging

There are several options strategies to consider to hedge risks:

We buy a call to hedge against an increase in the price of an asset, that is, our goals when buying a forward on oil and buying calls on oil are the same: not to lose on market growth. The producer will never buy the call. After all, its goal is to hedge against the risks of falling prices. But a consumer (such as an airline) will buy calls to reduce the risk of rising prices.
We buy a put to hedge against a fall in the price of an asset, that is, our goals when selling a forward on oil and buying a put on oil are the same: not to lose when the market falls. In this case, the buyer of the puts will be the producer, since the fall in prices reduces his income. The consumer will never buy a put: if the price of oil goes down, he will save on fuel costs. A weaker form of hedging is writing options. The sales premium does more to increase income than to significantly reduce risk.
We sell calls when we own the asset (producer), typically at a price above the asset's current forward price, for example, if oil for three-month delivery costs $30, you sell 35 calls. If the price on the market does not reach 35, the strike price at which we are committed to selling the asset, the option buyer will not want to exercise his right: he will be able to buy oil cheaper on the market. In this case, we will receive additional profit equal to the premium we received for the option.
We sell a put without owning the asset (the consumer), typically at a price below the current forward price of the asset. For example, if oil for three-month delivery costs $30, we would sell 27 puts. If the price on the market does not fall to 27, the strike price at which we are committed to buying the asset, the buyer of the option will not want to exercise his right: he will be able to sell oil at a higher price on the market. In this case, we will receive an additional profit equal to the premium paid to us for the option.

So, options and their combinations (strategies) can be adjusted to hedgers' market forecasts, giving hedging flexibility. For example, you can hedge only the most “catastrophic” option: at a price of $30 per barrel, an oil corporation can hedge against a fall in oil prices below $20 per barrel by buying a put with a strike price of $20. However, it will still have the risk of incurring large losses, but there is still the possibility of significant profits if the price of oil rises.

The flexibility of hedging instruments allows corporations or investors to tailor them to their risk appetite. One of the main criteria for risk appetite is the budgeted profit margin. If a corporation's operating profit level is low, hedging should be as conservative as possible, since even small market fluctuations can lead to unprofitability. This principle is useful for wholesalers whose income is a small premium over costs, and for manufacturers in highly competitive industries where prices are reduced to the limit.

Once the concept and instruments of hedging are defined, the procedure should become mechanical: the risk is defined and must be hedged according to an approved algorithm. Then hedging becomes completely independent of the market forecasts of the contractor. In practice, it is impossible to completely avoid them, since most hedging program implementers creatively manipulate timing, structures, or price levels.

The development and approval of a hedging program goes through several stages. At the first stage, the company decides whether it is going to protect its products, income, expenses or prices for consumed raw materials from market fluctuations. Once you have decided to start a hedging program, you need to make a choice between hedging through forwards and options. If options are used as a basis, it is necessary to determine the risk parameters acceptable to the corporation and budget for the cost of hedging (option premiums). After this, it is necessary to select specific strategies (option combinations) that correspond to the risk parameters and resources allocated for hedging.

Experience shows that the most successful hedging programs are “mechanical” ones, where execution is independent of market forecasts and personal inclination. Paradoxically, you have to choose between planned sales levels or the game of guessing the direction of the market.

CONCLUSION

The first chapter presented the definition of hedging, the classification of hedges, as well as the main methods of hedging financial risks.

Hedge (hedging) is any opening of positions aimed at insuring other already existing open positions. Hedge can be either an independent combination or part of another strategy. There are long and short hedges. A long hedge protects against rising prices, while a short hedge protects against falling prices.

In the second chapter of the test there was the concept of options and their classification. Thus, options are still a new phenomenon in the world of investment activity. With their help, we can insure existing positions, guarantee profits and actively take advantage of the opportunities of the current moment. A prepared investor can profit by using options wisely. However, we must always remember that every opportunity to make a profit has a downside - risk. Only by conducting the necessary analysis will we be able to find those few strategies that will be convenient for us and will bring us profit.

There is a wide variety of contracts that have features of options. Many varieties can be found even among widely used financial instruments. However, traditionally the term “options” is used only in relation to certain instruments. Other instruments, although of a similar nature, are called differently.

The most well-known option contract is the call option on a stock. It gives the buyer the right to buy ("call") a specified number of shares of a specified company from the writer of the option at a specified price at any time up to and including a specified date.

A put option gives the buyer the right to sell a specified number of shares of a specific company to the writer of the option at a specified price at any time up to and including a specified date.

Consequently, during the writing of the test work, an analysis of the use of options for hedging portfolio risks was carried out, that is, the following tasks were completed: firstly, the concept of hedging and options was considered; secondly, their use for hedging financial risks is considered.

HEDGING

(Hedging against inflation) Protecting your capital from inflationary shocks by purchasing stocks or investing in other assets that are expected to appreciate in value as prices rise.

Finance. Dictionary. 2nd ed. - M.: "INFRA-M", Publishing House "Ves Mir". Brian Butler, Brian Johnson, Graham Sidwell and others. General editor: Ph.D. Osadchaya I.M.. 2000 .

HEDGING

HEDGING is a form of insurance of price and profit when making futures transactions, when the seller (buyer) simultaneously purchases (sells) the corresponding number of futures contracts. HEDGING enables entrepreneurs to insure themselves against possible losses by the time the transaction is liquidated for a period of time, provides increased flexibility and efficiency of commercial transactions, and reduces the cost of financing trade in real goods. HEDGING allows you to reduce the risk of the parties: losses from changes in commodity prices are compensated by gains on futures.

Dictionary of financial terms.

Hedging

Finam Financial Dictionary.

Hedging

Hedging - in foreign exchange markets - the purchase (sale) of foreign exchange contracts for a period simultaneously with the sale (purchase) of cash currency with the same delivery period and conducting a reverse operation when the actual delivery date of the currency arrives.

In English: Hedging

Finam Financial Dictionary.

Hedging

Hedging - in the markets of real goods - reducing the risk of losses caused by unfavorable changes in market prices for goods that must be sold or purchased at future prices.
When hedging, the seller (buyer) of a commodity enters into an agreement for its sale (purchase) and at the same time carries out a futures transaction of the opposite nature. In this case, any price change brings sellers (buyers) a loss on one contract and a gain on another.

Finam Financial Dictionary.

Hedging

Hedging - in derivatives markets - the protection of open positions at risk, the price of which is expected to fluctuate during the period while the position remains at risk.

Finam Financial Dictionary.

Hedging

Hedging - in futures markets - is a form of insurance of price and profit when making futures transactions, when the seller (buyer) simultaneously purchases (sells) the corresponding number of futures contracts.

Finam Financial Dictionary.

Hedging

Hedging is insurance against the risk of price changes by taking an opposite position on a parallel market.
Hedging:
- makes it possible to insure yourself against possible losses by the time the transaction is liquidated for a period;
- provides increased flexibility and efficiency of commercial operations;
- ensures reduction of costs for financing trade in real goods;
- allows you to reduce the risks of the parties: losses from changes in commodity prices are compensated by gains on futures.

In English: Hedging

Finam Financial Dictionary.

Hedging

What's happened hedging?

The modern economy is characterized by significant price fluctuations for many types of goods. Producers and consumers are interested in creating effective mechanisms that can protect them from unexpected price changes and minimize adverse economic consequences.
There are always financial risks in the activities of any company, be it an investment fund or an agricultural producer. They can be associated with anything: the sale of manufactured products, the risk of depreciation of capital invested in any assets, the purchase of assets. This means that in the course of their activities, companies, other legal entities and individuals are faced with the likelihood that as a result of their operations they will receive a loss, or the profit will not be what they expected due to an unforeseen change in the price of that asset. with which the operation is performed. Risk involves both the possibility of loss and the possibility of gain, but people, in most cases, are risk averse, and therefore they are willing to give up more profit to reduce the risk of loss.
For this purpose, derivative financial instruments - forwards, futures, options - were created, and operations to reduce risk with the help of these derivatives were called hedging(from the English hedge, which means to enclose with a fence, to limit, to avoid a direct answer).

Hedging concept impossible to reveal without a clue risk.

The risk is– the likelihood (threat) of losing part of one’s resources, losing income or incurring additional expenses as a result of certain financial transactions.

Any asset, cash flow or financial instrument is subject to the risk of impairment. These risks, according to the generally accepted classification, are divided mainly into price and interest. Separately, we can highlight the risk of non-fulfillment of contractual obligations (since financial instruments are essentially contracts), called credit.

Thus, hedging is the use of one instrument to reduce the risk associated with the adverse impact of market factors on the price of another related instrument or on the cash flows generated by it.
Usually hedging means simply insuring the risk of changes in the price of an asset, interest rate or exchange rate using derivatives, all this is included in the concept hedging financial risks(since there are other risks, such as operational ones). Financial risk is the risk that a market agent is exposed to due to its dependence on market factors such as interest rates, exchange rates and commodity prices. Most financial risks can be hedged due to the presence of developed and efficient markets in which these risks are redistributed among participants.

Risk hedging is based on a strategy for minimizing unwanted risks, so the result of the operation may also be a decrease in potential profit, since profit, as is known, is inversely related to risk.
If previously hedging was used solely to minimize price risks, now the purpose of hedging is not to eliminate risks, but to optimize them.

Hedging mechanism consists in balancing obligations in the cash market (commodities, securities, currencies) and opposite in direction in the futures market. So, in order to protect against monetary losses on a certain asset (instrument), a position can be opened on another asset (instrument), which, according to the hedger, can compensate for this type of loss.

Thus, Hedge is a specific investment made to reduce the risk of price movements, such as options or short selling;

The cost of hedging should be assessed taking into account possible losses in the event of abandonment of the hedge. In this regard, it should be noted that strategies based on derivative financial instruments are used instead of traditional methods precisely due to lower overhead costs due to the high liquidity of derivatives markets.

Glossary of terms and abbreviations of the forex market, Forex EuroClub.

Hedging

Insurance against losses. A transaction undertaken by a trader or dealer who wishes to protect an open position at risk, primarily the sale or purchase of a commodity, currency, security, etc., the price of which is expected to fluctuate during the period that the position remains at risk. For example, a manufacturer has entered into a contract to sell a large batch of goods in six months. If its production depends on the supply of raw materials, the price of which fluctuates, and if it does not have sufficient stocks of these raw materials, it is at risk. He may decide to secure his position by purchasing the necessary raw materials through a futures contract. If raw materials must be paid for in foreign currency, the manufacturer's foreign exchange needs can be insured by purchasing the required currency under a forward contract or through an option. Such transactions do not provide complete protection because spot and futures prices do not always match, but hedging can significantly reduce the exposure of a risk position. Buying futures and options to protect against risk is just one type of hedging, which is called "long" hedging. In short hedging, something is sold to cover risks. For example, a fund manager may have a large holding of long-term fixed income investments and fears that an expected rise in interest rates will reduce the value of the portfolio of securities. This risk can be hedged by selling interest rate futures on the financial futures market. When interest rates rise, losses in the value of the securities portfolio will be offset by profits obtained by offsetting sales of futures at a lower price.

Terminological dictionary of banking and financial terms. 2011 .

Synonyms:

See what "HEDGING" is in other dictionaries:

- (from the English hedge insurance, guarantee) opening transactions in one market to compensate for the impact of price risks of an equal but opposite position in another market. Typically, hedging is carried out to insure the risks of price changes... ... Wikipedia

hedging- A risk management strategy aimed at reducing or compensating potential losses due to price fluctuations. [Department of Linguistic Services of the Sochi 2014 Organizing Committee. Glossary of terms] hedging Insurance of participants... ... Technical Translator's Guide

- (hedging) An operation undertaken by a trader or dealer who wants to protect an open position at risk (open position), primarily the sale or purchase of a commodity, currency, security, etc., the price of which is expected to fluctuate over ... ... Dictionary of business terms

- (hedging) An operation that is intended to reduce the risk arising from other operations. If a company has inventories of a product, it faces the risk of losses if the price falls. This loss can be avoided by hedging... Economic dictionary

Insurance against losses, insurance transaction Dictionary of Russian synonyms. hedging noun, number of synonyms: 6 insurance (5) ... Synonym dictionary

Hedging- insurance of participants in a commercial transaction against losses associated with possible changes in prices during its implementation. By concluding a contract on the futures market, the hedger agrees with the counterparty on the delivery of his goods in advance... ... Economic and mathematical dictionary

Hedging- – insurance of financial risks by taking an opposite position on an asset on the market. For example, a company produces a certain number of tons of oil per month. But she doesn't know how much her products will cost in three months. She has... Banking Encyclopedia

Insurance of currency and other risks through foreign trade and credit transactions, changing the currency of a trade or credit transaction, creating reserves to cover possible losses, etc. In a narrower sense, insurance of currency risk by... ... Legal dictionary

- [Dictionary of foreign words of the Russian language

Hedging- (English hedging, from hedge) is a term used in banking, stock exchange and commercial practice to designate various methods of insuring currency risk... Encyclopedia of Law

Books

Fundamentals of financial calculations. Asset portfolios, optimization and hedging. Textbook, Kasimov Yuri Fedorovich, Al-Nator Mohammed Subhi, Kolesnikov Alexey Nikolaevich. The third part examines stochastic methods for analyzing financial markets. Here we present modern portfolio theory (Markovich theory) and the financial asset pricing model (CAPM).…

In the system of enterprise risk management methods, the main role belongs to internal mechanisms.

Internal mechanisms for neutralizing financial risks are methods for minimizing their negative consequences, selected and implemented within the enterprise itself.

These include:

risk avoidance;

limiting risk concentration;

hedging;

diversification;

creation of special reserve funds (self-insurance funds or risk fund);

insurance.

Hedging is a system of concluding futures contracts and transactions that takes into account probable future changes in exchange rates and aims to avoid the adverse consequences of these changes.

In a broad interpretation, “hedging” characterizes the process of using any mechanisms to reduce the risk of possible financial losses - both internal (carried out by the enterprise itself) and external (transferring risks to other business entities - insurers). In a narrow sense, the term “hedging” characterizes an internal mechanism for neutralizing financial risks, based on insuring risks against unfavorable changes in prices for any inventory items under contracts and commercial transactions involving the supply (sale) of goods in the future (usually derivative securities - derivatives).

A contract that serves to insure against the risks of changes in exchange rates (prices) is called a “hedge,” and the business entity carrying out the hedging is called a “hedger.” This method makes it possible to fix the price and make income or expenses more predictable. However, the risk associated with hedging does not disappear. It is taken over by speculators, i.e. entrepreneurs taking a certain, pre-calculated risk.

There are two hedging transactions: upside hedging and downside hedging.

Upward hedging (purchase hedging) is an operation to purchase futures contracts or options. An upward hedge is used in cases where it is necessary to insure against a possible increase in prices (rates) in the future. It allows you to set the purchase price much earlier than the actual product was purchased. A hedger that hedges to an upside insures itself against possible price increases in the future.

Downward hedging (sale hedging) is an exchange operation involving the sale of a futures contract. A hedger who hedges down expects to sell a commodity in the future, and therefore, by selling a futures contract or option on the exchange, he insures himself against a possible price decline in the future. A downward hedge is used in cases where the product needs to be sold at a later date.

Depending on the types of derivative securities used, the following mechanisms for hedging financial risks are distinguished.

1. Hedging using futures contracts is a mechanism for neutralizing risks from operations on commodity or stock exchanges by conducting opposite transactions with various types of exchange contracts.

The principle of the hedging mechanism using futures contracts is based on the fact that if an enterprise suffers a financial loss due to changes in prices at the time of delivery as a seller of an actual asset or securities, then it gains in the same amount as a buyer of futures contracts for the same amount of assets or securities. securities and vice versa.

2. Hedging using options - characterizes the mechanism for neutralizing risks in transactions with securities, currencies, real assets or other types of derivatives. This form of hedging is based on a transaction with a premium (option) paid for the right (but not the obligation) to sell or buy, during the period specified in the option contract, a security, currency, real asset or derivative in a specified quantity and at a predetermined price.

3. Hedging using a SWAP operation - characterizes the mechanism for neutralizing risks in transactions with currency, securities, and debt financial obligations of an enterprise. The swap operation is based on the exchange (purchase and sale) of relevant financial assets or financial liabilities in order to improve their structure and reduce possible losses.

Swap (English Swap i.e. exchange) is a trade and financial exchange operation in the form of an exchange of various assets, in which the conclusion of a transaction for the purchase (sale) of securities, currency is accompanied by the conclusion of a counter-transaction, a transaction for the reverse sale (purchase) of the same product through a certain period under the same or different conditions.

Hedging example: Let's say you are a shareholder of GazProm, and you expect the stock to grow in the long term. But fearing a short-term price decline, you insure yourself, i.e. hedge against the fall. To do this, you buy an option with the right to sell (English put option) shares of GazProm at a certain price. If suddenly your fears become reality and the market price of the stock falls below the strike price specified in the option, then you will simply sell the share at this price specified in the option.

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