Hedging is a real opportunity to hedge against risks

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In the global economy of the 1970s and 1980s, unprecedented volatility was commonplace. Almost all goods were subjected to price hikes. Any entrepreneurial activity was inextricably linked with a certain risk. In Spanish, the word "risko" refers to a rock with a steep slope. Ozhegov in his dictionary assigned a dual property to risk. First, it is an expected danger, in contrast, the risk was defined as an action in the hope of a happy outcome, at random.

Then the beginnings of risk management strategies emerged.

To mitigate and eliminate financial risks, many methods and tools have been invented, collectively called hedging. Hedging is risk insurance in the field of financial activity, which is expressed by taking the opposite position to the asset in the market. Translated "hedge" means "fence", "protection". Forex hedging is used in a variety of situations. Earnings on fluctuations in currency quotes andthe cost of securities involves a deep study of the state of affairs in the market, as well as the development of strategies to prevent risks.

Considering the insurance of financial transactions from the point of view of technique, we can clearly distinguish two types of hedging. This is a short and long hedge. The first involves the sale of futures contracts, the second is the purchase of futures contracts. Options hedging is considered separately, option sellers widely use delta hedging in their practice.

There are two steps to any hedging trade. The first is opening a position on a futures contract, the second is closing it with a reverse transaction. The classic hedging option is when contracts for both positions are concluded for the same product, for the same quantity, for the same delivery line (within a month).

Considering selling hedging, it can be noted that this type of insurance involves the use of a short position in the futures market when there is a long position in the cash market. In this option, the price of the goods at which it is planned to sell it is protected. This method is widely used by sellers of real goods who want to protect themselves from falling prices. This type of hedging is used to protect stocks of goods or financial instruments that are not covered by forward transactions. Short hedge has found its use in casesthe need to protect the prices of products that have not yet been produced or forward purchase agreements.

Buy hedging is carried out by buying a futures contract by the owner of a short position in the market. As a result, the purchase price of the goods is fixed. This hedging protects against the risks that may arise in the course of forward sales at fixed prices, from fluctuations in the prices of raw materials, is widely used in production that has a stable price. Intermediary firms that have entered into transactions designed to purchase goods in the future, processing companies use this type of financial insurance.