What is hedging ?

What is hedging ?

So often we hear that hedging reduces the risk of price fluctuations.And, naturally, this topic is primarily interested financiers and people who create their work in the market and investors.So, in this article, we shall understand in more detail what is hedging and what are its features.

Features

hedging To begin with, we note that the hedging - are certain measures that are aimed at risk insurance in the financial markets.In simple terms, it is a kind of agreement on purchase and sale of a product in the future.Do not be surprised if you hear the phrase "currency risk hedging", because the currency of insurance also performed.The thing that is constantly going on fluctuations in the market price, and this is nothing new in the world.Therefore, take into account the market price, which may be in the future, both sides ostensibly insure themselves against unpleasant surprises.

Recall and that hedging is paid, so if you do not happen to unforeseen situations in the future, then we will lose par

t of the profit, but, on the contrary, in the other case, we will keep the profit.

Key examples

Just note the two existing concepts in this matter, operated by hedgers - financiers, which produce risk insurance.The first is the futures - derivatives that oblige both sides to make a deal in the future at a pre-agreed price.Second, options - derivatives that give the opportunity to make a deal in the future at a pre-agreed price, but is not mandatory.

So give a few examples:

  • you are a shareholder of a company, and expect that the share will continue to grow in the future.But there is a possibility that the price of her fall.Therefore, you are insured against price falls.To do this, you get the option the right to sell this stock at a certain price.And if the price still will fall in the future, you can still sell a stock at a predetermined price.But remember that you have a right to, but does not agree to perform it.
  • you are a director of a company which produces beer and of course, you constantly need to buy the barley.In this case, the expectation that the price of barley may increase, your company acquires a future or it is also called

futures contract, where there will be indicated the price you pay for barley in the future.And it is very advantageous if all the price for barley really take off, but if it stays the same or decreases, then you will be in loss, since you still have to pay the agreed price.

hedging techniques

So now let's see what are the methods of hedging exist today:

  • Derivatives.This hedging, an example of which we have given above, and talked about it in detail.
  • Immunization portfolio.This method was created for investment.This procedure involves the hedging of certain assets through a completely different spot spot asset, which has a high correlation of price sensitivity.

So, now you know what is hedging and what its aims are directed.But before we make the insurance for a particular transaction should consult with an experienced financier, in order to really make a profit in the future, rather than a loss.