The purpose of hedging (risk insurance) is to protect against adverse changes in prices in the stock market, commodity assets, currencies, interest rates, etc. Below are some of the options hedging:

Let us dwell in more detail, as an example, on the hedging of currency risks.

If the activity of an enterprise is related to the import/export of products or services, or it attracts/places loans/deposits in foreign currency, then the company inevitably faces currency risk, i.e. it may incur losses due to an unfavorable change in the exchange rate foreign exchange in relation to national.

Hedging can significantly improve results economic activity enterprises:

• the risk of unfavorable changes in the foreign exchange rate against the national currency is insured
• the uncertainty in obtaining future income is removed, financial flows become more transparent
• in some cases, the cost of attracted credit resources decreases
• company's funds are released and manageability is increased

For example, an enterprise operates in Russia and takes out a loan of 1 million US dollars (or euros). Obviously, the growth of the dollar (euro) is unprofitable for the company, since the ruble will depreciate, and the company's revenue is formed in rubles. The weakening of the ruble against the dollar (euro) will have a negative impact on the company's profits.

The planned devaluation of the national currency by the Central Bank of the Russian Federation is one of the main reasons for the fall of the ruble. Another important reason is rather low oil prices and a significant outflow of dollars from the country.

In this situation, the best option is hedging (insurance) of currency risks with the help of derivative instruments - futures or options.

Example 1
The company operates in Russia, takes a dollar loan in the amount of 1 million US dollars. In order to insure against the growth of the dollar, you need to buy a futures on the US dollar, or a call option on this futures. As a result, if the dollar exchange rate increases and the cost of the loan to be repaid increases, the company will profit from derivatives and thus compensate for losses from the growth of the dollar.

Example 2
The company operates in Russia, and exports its products abroad and receives revenue in US dollars. In order to insure against the growth of the ruble, you need to open a short position (short) on the US dollar futures, or buy a put option on this futures. As a result, if the dollar exchange rate falls and revenue decreases, the company will profit from derivatives and thus compensate for losses from the growth of the ruble exchange rate. Hedging allows you to predict in advance the ruble revenue of an enterprise, regardless of the hard-to-predict behavior of exchange rates.

Let's define the term first. Hedging is certain measures that are aimed at insuring any risks in the foreign exchange market. More specifically, this is the opening of a trade in one of the markets to further offset the impact of any price risks is equal to, but at the same time, the opposite position in the other. financial market.

And now, simply put, hedging is an established agreement to buy or sell a commodity or currency at a set price in the future in order to minimize the risks of market price fluctuations.

As a result, two subjects (traders), knowing at what price the transaction will take place in the future, decide to insure themselves against sudden fluctuations in the market price.

It would be logical to guess that if we try to reduce risks, we thereby reduce our potential profit. The main rule of investing immediately comes to mind: “The greater the risks, the greater the profit.”

As a result, if an undesirable result occurs, we will not suffer losses, since we have hedged. However, if the end result is favorable, we won't get all the profits because we paid for protection.

We can say that hedging is divided into two main types: currency risk hedging and hedging with futures instruments (futures, options, forward contracts).

Hedge example: You are a shareholder of a company. You expect the company's stock prices to rise in the long run. But in the short term, prices may drop. As a result, risk hedging is an excellent option. For hedging, you need to purchase an option to sell the company's shares at a set price. If indeed in the short term the price falls below the price specified in the option price, then you can simply sell the shares at the price specified in the option. Below we describe each type of hedging in detail.

Hedging currency risks

Hedging currency risks sometimes referred to as currency hedging. This type is intended for concluding urgent transactions for the purchase or sale of foreign currency in order to avoid price fluctuations in the market.

Currency risk hedging consists in buying/selling foreign exchange contracts for the same period as the sale/purchase of a currency. Most often, currency risk hedging means protecting one's own Money from adverse price fluctuations in the market, which consists in fixing the current value of funds through the conclusion of transactions in the foreign exchange market.

Currency hedging example: A Polish importer decided to enter into a contract for the supply of equipment from Germany in five months for a total amount of one million euros. Assume that the importer will have to pay full amount under the contract only after receiving the equipment. It follows from this that payment will take place only after five months, then the importer bears certain risks, since the euro exchange rate may change. The importer does not want to take risks and avoid the risk of euro appreciation. To do this, the importer buys the euro currency for payment in five months already now using the futures market. As a result, he buys the necessary futures for 5 months at the current price.

Hedging tools and strategies

Perhaps the most important tool for risk hedging there will be options, futures, forwards, swaps. Each of the tools is designed for a specific purpose. Options are the most popular hedging tool (we will talk about them in more detail in the next section).

To date, there are two main hedging strategies. The first is related to portfolio immunization, and the second is related to financial market derivatives. We will go into detail about each hedging strategy.

Portfolio immunization refers to hedging only one spot asset through another spot asset with a high price sensitivity correlation. Also, hedging any debt obligations or any shares through securities of other companies is the main part investment activity in any financial market.

Derivative financial instruments (sometimes also called derivatives) are over-the-counter or exchange-traded futures contracts that are based on financial transactions or contracts. Among them, it is worth noting stock options, forwards, futures contracts. Derivatives on swaps and swaps themselves. In fact, there are a lot of financial instruments and there is a tool for any specific situation.

Risk hedging in Russia

According to breaking news, central bank Russian Federation intends to develop all mechanisms for hedging currency risks. Yes, basically monetary policy Central Bank for 2015, the following is stated: “The Central Bank of the Russian Federation is expected to actively participate in resolving issues that directly affect the development of the stock market. All measures will be aimed at developing hedging instruments by improving the legislation that regulates the issuance and circulation of derivative financial instruments.”

The Central Bank, together with other regulators, will work to introduce a new system for monitoring the financial stability of the market, based on an assessment of systemic risks.

Options hedging

In this section, we want to talk in detail about options hedging, since this type is the most common in the financial market. So. Option hedging is a special exchange operation that is designed to fix the price of the underlying asset. As a result, the risk of a possible adverse change in its total value in the future will be eliminated.

Basic rules for hedging options: there is a certain need to insure a position against a fall in price, then you need to buy a put option or sell a call option. On the other hand, if insurance is necessary to eliminate the risk of an increase in the value of an asset, then it is necessary to sell a put option or purchase a call option. Below we will talk about all four options and give examples.

Buying a put option

Do you own shares in a bank? You are worried that after a certain time the price of these shares will fall. To remove the uncertainty, you decide to hedge your stock position by buying a put option. For example, one share costs 100 rubles, and the cost of the option is five rubles.

As a result, insuring your position, you spend five rubles per share. The purchased option will give you the opportunity to purchase shares at a price of 100 rubles per share, while it will not depend on what price will be on the market. Simply put, you insure yourself against the fact that the price per share may fall below 100 rubles. This type of strategy does not exclude making a profit when the price of the company's shares rises.

Sale of call options

Exactly the same conditions. Only the owner of the shares decides to hedge with options against a fall in the value of the shares by selling a call contract. The market value of the share is also 100 rubles, and the option premium is also 5 rubles. The seller of the option assumes the obligation, according to which he will have to sell shares at 100 rubles, if the buyer himself requests it, for which he will receive a profit that will be equal to the option premium.

As a result, if the price falls below 100 rubles, then the call option simply will not work. In this case, the investor is left with a profit that will be equal to the option premium. Otherwise, if the price is more than 100 rubles per share, then the call option will work. Then all losses will be compensated by the profit that was received in the spot market.

Currency risk is the risk of losing money when buying and then selling a currency at different rates. One of effective ways to control such risk is currency hedging. Currency risk hedging is the protection of funds by fixing their value with the help of derivative financial instruments of the Forex market.

Currency hedging

Currency risk hedging is the conclusion of futures contracts for the sale and / or purchase of currency at an agreed rate.

Taking into account the controlled risk, currency hedging of the seller and the buyer is distinguished. Hedging (insurance) of the buyer is carried out in connection with the possible growth of the exchange rate. Respectively currency risk hedging the seller represents protection against a possible decrease in the exchange rate.

For example, in order to protect against a possible fall in the euro, a company that plans to receive this currency at the end of November may enter into a contract in October to sell the euro in early December at a favorable rate. And the reverse situation: if the borrowing company, for example, needs to repay a large currency loan in a month, it can conclude a contract for the future purchase of currency, eliminating the risk of its appreciation.

There are several main types of futures contracts used to hedge currency risk - forwards, futures and options. Importers / exporters usually enter into forward contracts with their banks, which stipulate that the financial institution, as the client needs to purchase / sell currency in connection with settlements with suppliers / buyers, will supply (redeem) the currency at a certain rate.

The question arises: what is the point of concluding a forward contract for its second participant, because in this case he assumes possible risks? The answer is simple - its benefit is that the contract indicates a slightly over/understated (compared to the current) exchange rate. That is, in fact, you insure yourself against a serious change in the course for a small percentage of the transaction amount.

Currency risk hedging: futures and options

They trade not only currency, but also futures contracts for its purchase/delivery. Long-term investors buy such to protect themselves from risks, from eating directly for currency hedging, and short-term investors simply speculate on the difference in rates.

In the financial market, such derivative securities as futures are traded, which differ from forwards in the presence of standardized conditions. In addition to the exchange rate, they clearly stipulate the time and amount of currency delivery. Such financial instruments can be resold many times in the market. The guarantor for currency hedging when using futures is the exchange or clearing company through which settlements between buyers and sellers are carried out.

Another type of futures contracts that are concluded when hedging currency risks are options that give their owners the right to fulfill the contract (buy / sell currency) at a certain rate in the future, but do not oblige them to do so, unlike futures. Options have a certain price (option premium), which the costs of the person exercising currency hedging, and are limited.

Translated from of English language "hedge" means "guarantee" Therefore, hedging in a broad sense can be called a certain set of measures that are aimed at minimizing the possible financial risk in the process of concluding any transaction. It would be correct to say that we are talking about the usual agreement between market participants in the process of buying and selling about the invariance of the price over a certain period.

Hedging currency risks is a method of protecting finances from fluctuations in exchange rates, involving the conclusion of transactions for the purchase and sale of foreign currency. It involves the exclusion of negative fluctuations in value, which becomes possible due to the conclusion of futures transactions with the fixation of the current exchange rate at a particular moment. The ability to protect yourself from unwanted fluctuations is the plus and minus of the method, since insurance guarantees the safety of the asset, but does not give a profit.

In the Forex market, the hedging technique looks quite simple: opening an opposite position to an already concluded deal, which is used if the trend reverses and the current deal becomes unprofitable. So, the counter brings her income.

Thus, a trader concludes two transactions for one financial instrument of identical volume, but in opposite directions. One is profitable, the other is loss. As soon as it became clear which position is profitable and the trend is clearly defined, the unprofitable one can be closed.

The main principles of hedging currency risks, which this article discusses:

• The impossibility of completely eliminating the risks, but the chance to make them acceptable and harmless
• When choosing methods and tools, it is necessary to take into account the level possible losses and the ratio of benefits from the operations carried out and the costs of their implementation
• Careful development of a program that involves the improvement of hedging mechanisms for a specific account, company, investor
• Consideration of conditions and context - in one case, the chosen method will be ideal, in the other - inefficient

Basic tools for conducting operations

Considering that hedging is an operation to insure funds, involving price fixing, it is not surprising that the main instruments in this case are options and futures, which are contracts for a transaction in the future at a predetermined cost.

After all, the main task is to eliminate the risk of the buyer to acquire at an unknown price, and the risk of the seller - to sell at an unknown cost. Thanks to these tools, it is possible to determine the value in advance, hedging short and long positions of investors.

Main types of hedging:

1) Futures– contracts that give a mutual obligation to sell/purchase an asset in the future on a specified date at a precisely agreed price. This is the most natural and easiest way. There are futures for stocks and indices, currencies and bonds, and commodities. Therefore, all this can be hedged by developing proposals for improving the hedging mechanism for both currency risks and others.

Full hedging in the futures market provides one hundred percent insurance, excluding the possibility of losses as much as possible. If partially hedged, only part of the real deal can be insured. The main advantages of futures contracts are: minimal margin due to the lack of capital investments, the ability to use different assets, standardization.

There are two types of use of the method - hedging by buying (insurance against a price increase in the future) and selling (selling the real product to hedge against a fall in value).

2) Options, which are offered on the market for futures contracts and represent the right to sell or buy a certain amount of the underlying asset (of a particular futures) before a specific future date. Options are contracts for futures, and therefore their groups are the same.

Methods and types of hedging

Trying to minimize currency risk, the following hedging strategies are used:

• Classic strategy- appeared back in Chicago on the commodity exchanges, when, due to the possibility of non-execution of transactions postponed for one reason or another, along with the transaction contract, they entered into an option for the supply of goods at the cost of the primary contract.
• Direct hedging- the simplest way, involves the conclusion of a fixed-term contract for the sale of an available asset in order to fix the sale price for the period of its validity.
• anticipatory– allows you to protect assets before planning a deal. By planning the operation and observing the right price at the moment, you can buy a futures contract for the desired asset, so that its current price will be fixed in the future.
• Cross - often used to protect a portfolio of securities. The method involves the conclusion of a futures contract not for an asset that already exists, but for another one, which is to a certain extent similar in price behavior. So, to hedge a portfolio that includes different securities, fearing that it will fall in price, you can sell an option or futures contract on the RTS index, which is considered a barometer Russian market. The investor anticipates that if the portfolio falls in the market, then this is a bearish trend, so thanks to a short position on a futures contract, it is possible to soften the drawdown a little.
• Destination hedging- having long positions in the portfolio and fearing for a depreciation, the investor can dilute the portfolio with short positions on weak securities. Then, in the event of a general decline, short trades will bring profit, compensating for the loss on long trades.
• Cross-industry - when the portfolio contains assets of one area, you can include long positions in assets of another industry, which will grow when the first ones decrease. So, if the portfolio contains securities of domestic demand, in the event of an increase in the US dollar, you can insure them by including long positions in exporters' securities, which usually grow with an increase in the exchange rate.

Today, there are a huge number of different methods and methods of hedging, and, as statistics show, this method of asset insurance gives good results. Correctly determining the direction of transactions and their volume, concluding the appropriate transactions, you can significantly reduce the risks.

AT modern world, where price is an unstable concept, the problem of risk insurance arises. Almost any business is at least partially associated with the volatility of the exchange rate, and in order not to lose money due to the next jump at one “perfect” moment, entrepreneurs must know how to insure themselves. Currency risk hedging is one of the most common ways that allows you not to depend on the exchange rates of world currencies. I'll try now in simple words explain what it is and how to use it.

The word "hedging" in translation means "insurance", "guarantee", now it is actively used in the field of finance. If we return to the topic of this article, then currency risk hedging is the actions of an entrepreneur aimed at reducing the risk associated with volatility. exchange rates. However, little can be learned from the definition, so now I will tell you why hedging is used and what financial instruments can be used to do this.

Who needs it?

Many entrepreneurs who work in the territory of one state, do not purchase imported goods and are not related to valuable metals or commodities with a volatile exchange rate (oil, gas), do not need to insure their risks. But for those who cooperate with foreign suppliers or buyers, work in the field of metal mining, etc., hedging is simply vital. Here are some examples of those areas of activity where risks need to be insured:

1. The most common option is the sphere of currency relations. And I mean not only exchange offices, speculators or brokers, but also simple importers or exporters, or businessmen who need foreign equipment or foreign raw materials to do business. Roughly speaking, any entrepreneur who is forced to change currencies or buy imported goods falls into this category.

What is the problem here? The problem is that the vast majority of companies plan their activities at least several months in advance, especially in the field of trade. That is why management needs to know how much money will have to be spent on the purchase of a certain product after 3 months, or at what price in national currency it will be possible to sell the goods to a foreign buyer. Of course, it all depends on exchange rates. For a better understanding, let's take a look at a simple example:

The entrepreneur works in the field of trade in imported equipment and is periodically forced to purchase goods in the United States, of course, for dollars. This month he received 100,000 rubles of net profit, and now he needs to decide how much money to spend on a new batch of goods, and how much can be used for other purposes. He plans that in a month he will need 10 units of certain products, the price of which at the current exchange rate will be 50,000 rubles. An entrepreneur with a clear conscience saves 50 thousand in a bank account, and for the remaining 50 he buys a Swiss watch. Time passes, and the dollar suddenly jumped, now a foreign supplier for the same product requires 60,000 rubles, which our entrepreneur does not have. You have to take your watch to a pawnshop =(. But how should you act to protect yourself from unplanned expenses? The moral of the fable is simple: hedge the risks, otherwise you will lose your Swiss watch =). Laughter, laughter, and many businessmen make serious and gross mistakes in this regard, due to which, at best, they suffer additional losses, and at worst, they can lose their business.

1. Not only importers or exporters need currency risk insurance. The fact is that some goods, such as, for example, oil, gas, the same gasoline, and sometimes precious metals, can quickly change in price. It turns out that if you own a transportation company, a gas station or a jewelry factory, then you are also associated with volatile rates and should be able to hedge risks.

1. In the field of corporatization, risk hedging is not widely spread, because there is a large proportion of speculators who earn on changing rates and are ready to take the associated risks. However, it happens that the partners agree to buy or sell shares in the future at a predetermined price.

To hedge or not to hedge?

To some, the question may seem strange, because risk insurance is not just a necessary, but a mandatory action for any financier, but everything is far from being so simple. Currency risk hedging is a double-edged sword. On the one hand, you insure yourself against exchange rate volatility and cannot lose money, but on the other hand, you cannot earn on the next jump. For example, if you enter into a futures contract, which will be discussed later, and the price goes in your direction, you have to work at the old rate. In this case, you will not lose money, but you will not be able to earn either.

If you want to plan your expenses, know at least approximately how much profit the business will bring in the next month, then hedging will be useful and necessary. But if you are a speculator, or just want to be able to make money on a jump in the exchange rate in your direction, then you can forget about insurance. Remember: you can not insure currency risks without losing the opportunity to earn on the jump in the exchange rate.

The irony is that speculators and entrepreneurs use the same instruments: options, futures, futures exchange transactions, but they use it all in different ways, which is why some insure their risks, while others take risks and try to earn. However, I will not go into details, in this article we are talking about hedging, and not about speculation.

What are the hedging methods?

Method #1: Futures!

One of the most common ways to insure your risks is futures contracts. The essence of the tool is that two parties (seller and buyer) agree in advance on the purchase and sale of a certain product after a certain time at the modern market rate. At the same time, it does not matter what the price of this product will be at the time of the expiration of the contract, both parties are obliged to proceed from a predetermined rate. Let's look at an example:

Two entrepreneurs agree to buy and sell 20 pieces of electronics for $100 each after 2 months. When time passes, the market value of the goods is already $ 120, but the transaction is still carried out at the old price according to the futures contract.

And here is an example in the field of selling currency:

In 3 months, an entrepreneur needs to purchase a batch of imported equipment, the price of which at the current exchange rate is 150,000 rubles. His supplier requires payment in dollars ($30,000). Then the entrepreneur goes to the stock exchange and concludes a futures contract there, which says that after 3 months he will be exchanged rubles for dollars at the rate of 50/1. Time passes, and the exchange rate drops to the level of 45 rubles for 1 dollar. It is more profitable for an entrepreneur to exchange currency at the current rate, but he is bound by an obligation under a futures contract and is obliged to redeem the currency in the amount of $30,000 at the rate of 50 rubles. Thus, the entrepreneur spent on the purchase of goods as much as he expected, although in this particular case he had the opportunity to save if he did not hedge the risks. Despite all this, hedging is still recommended, because an entrepreneur is not a speculator, he does not analyze the market, does not choose the most profitable moments for the exchange, which means that he is unlikely to be able to consciously earn on price changes. But he will lose the opportunity to plan his expenses and run the risk of running into a budget deficit for his company. Read more about futures and their scope in the article.

Method #2: Options!

The next hedging tool is options, which is very similar to futures, but only at first glance. An option is a contract, although personally I would call it security, the holder of which receives the exclusive right to buy or sell a certain product at a predetermined price. Moreover, if in the case of a futures you are obliged to make a deal, then in the case of an option, you do not have such an obligation, if the exchange rate at the time of contract execution is more profitable than the one indicated in the option, you can refuse the transaction. For such an advantage, oddly enough, you have to pay. If you want to become a holder of an option, you need to pay its cost to the seller, who, in the vast majority of cases, is a speculator. The value of the option depends on the dynamics of prices in the market and the volume of the transaction. Let's look at an example:

The owner of a jewelry factory needs to buy 20 kilograms of gold after six months. Now for all this you will have to pay 66,000 dollars, but no one knows what the rate will be after 6 months. Few companies have the ability to set aside money for such a long period, so you have to use options or futures. In addition to the risk of a rise in the dollar, there are risks of an increase in the price of gold. Assume that the plant has a reserve in US currency, it is only necessary to insure the second risk. Then the entrepreneur buys an option from a gold mining company for $2,000, which gives him the right to buy 20 kilograms of metal at the current exchange rate, for $66,000. Time passes, and the price of gold falls, now for all the metal needed by the jeweler, he must pay only 60 thousand. Given the fact that he only has the right to purchase, but not the obligation, he enters into an urgent deal with the same supplier, but at a more favorable rate. Of course, no one returns the price of the option, but all this time the entrepreneur was insured in case the price of the precious metal rises.

Method number 3: Pre-exchange!

Why invent something complicated when you can do it in a simple way? Another question: is it always possible to do it in a simple way? As a hedging option, you can simply change the currency in advance or buy the desired product in advance, in which case you do not risk. But few companies, especially large ones, can afford to do so. All the money a business makes as net profit goes somewhere, whether it's marketing, depreciation (repairing old equipment), expansion, or investors' pockets. That is why no self-respecting entrepreneur will save a decent amount for more than a couple of months, because in this case the money turns into dead weight, and the business develops much more slowly. However, if you are a young entrepreneur who cannot afford to enter into futures or options contracts, you can use this primitive method as well. In any case, primitive hedging is better than none at all.

Method number 4: Delayed delivery!

The procedure for postponing the delivery of goods is also good way insure risks. You can pay for the goods now, and demand its delivery after a certain period. In this case, it does not matter what the price will be at the time of the actual transfer of products to you. Few suppliers will refuse a 100% advance payment. In this case, you avoid currency risks, but risks of a slightly different kind arise - the supplier company may go bankrupt or experience problems at the time of the scheduled delivery, due to which you will not receive your goods on time or not at all. However, if you work with large and reliable organizations, this method is also acceptable.

How to make money on hedging?

With the help of hedging, you can not only insure your risks, but also earn. Naturally, you must understand the currency markets in order to correctly predict the future direction. Successful speculators on the stock or currency exchanges can make money on just one transaction annual budget medium company.

For beginners the best option can be considered an options market. Trading here is not so difficult, although you still need preparation and a clear strategy of action. All this you can emphasize from the article

Currency risk hedging is the future!

Risk insurance tools have appeared relatively recently, but now they are gaining more and more popularity. Entrepreneurs are ready to give up the possibility of earning on price changes, so as not to lose money if the course goes against. Given all these circumstances, the profession of a speculator is becoming more and more in demand, which has never happened before. Hedging is the future, I am sure that soon the vast majority of businessmen will begin to use futures and options, because this allows you to more effectively plan income and expenses.

To the end!

So, let's sum up. Currency risk hedging is a great opportunity for entrepreneurs to protect themselves from sudden fluctuations in exchange rates for currencies or other goods. Hedging is used by all financiers who are at least somehow connected with goods, the price of which may change, and almost all products in the modern world are such. Such a policy is able to insure or greatly minimize your risks, but at the same time, you will not be able to earn if the course goes in your direction. Nevertheless, risk insurance is recommended for all entrepreneurs whose business is not related to making speculative profits, because in this case you will not only protect yourself from losses, but will also be able to plan expenses more efficiently and develop faster.