HEDGING

Hedging



Hedging

Introduction

Today's economy characterized by significant fluctuations in the prices of many goods. Producers and consumers are interested in setting up effective mechanisms to protect them from sudden price changes and minimize the adverse economic consequences. In the activities of any company, whether it is an investment fund or the farmer is always a financial risk. They may be associated with everything: sales of products, the risk of depreciation of invested in any assets of capital, purchase of assets. This means that in the normal course of business of the company, other legal and physical persons are faced with the possibility that as a result of their operations they will have a loss or profit will be not the same in that they expected because of unanticipated changes in prices for the asset, with which the operation is conducted. Risk includes both the possibility of loss and the possibility of winning, but people who in most cases, risk-averse, so they agree to give up more profits for the sake of reducing the risk of loss. For this purpose have been established financial derivatives including forwards , futures , options - and the operations to reduce the risk of using these derivatives are called hedge.

Hedging

The concept of hedging is impossible to open without the concept of risk. The risk of this threat of losing resources, shortfalls in income or work extra costs as a result of certain financial transactions. Any asset, cash flow or financial instrument at risk of impairment. These risks, according to conventional classification, divided largely on price and interest. Separately, you can allocate the risk of non-contractual obligations (as the financial instruments are essentially contracts), called the credit (Brewer, 2003, 90).

Hedging is to use one tool to reduce the risk of adverse market factors influence the price of another, the associated tool, or they generated cash flow. Usually, the hedging of risk insurance to understand simply change the asset price, interest rate or exchange rate with the help of derivatives, all included in the concept of hedging financial risk (because there are other risks, for example, Windows). Financial risk - the risk that the market agent is exposed because of their dependence on market factors such as interest rates, exchange rates and commodity prices. Most of the financial risks can be hedged through well-developed and efficient markets in which these risks are redistributed among the participants.

Hedging strategy based on minimizing unwanted risk, and therefore the result of operation can be also reduced the potential profit, since profit is known to be inversely related to risk. If you have previously used solely for hedging price risk minimization, we now appears not to hedge risk removal, and their optimization. Hedging mechanism is to balance the commitments in the cash market (goods, securities or currencies) and opposite in direction to the futures market. So in order to protect against financial loss on a particular asset (the instrument) may be an open position in another asset (tool), which, according to hedger is able to compensate for this type of loss. Thus, hedge is the specific investments made to reduce the risk ...