Forex hedging. Methods of hedging transactions in financial markets

Hedging performs the function of exchange insurance against price losses in the market for real goods and provides compensation for certain expenses (for example, for storing goods). The hedging technique is as follows. The seller of a cash commodity, trying to insure himself against an expected price decline, sells a futures contract for this commodity on the exchange (sale hedging). If prices fall, he buys back a futures contract, the price of which has also fallen, and makes a profit in the futures market, which should compensate for the revenue he lost in the real commodity market (see conditional example 1).

Conditional example 1

The seller ultimately received from the sale of the commodity (80 units) and from the futures market (20 units), i.e. the amount of revenue that he expected to receive as of January 1 (100 units).

The buyer of available goods is interested in not incurring losses from rising prices for goods. Therefore, believing that prices will rise, he buys a futures contract for this commodity (hedging with a purchase). If the trend is guessed, the buyer sells his futures contract, the price of which has also increased due to the rise in prices on the market for real goods, and thereby compensates for his additional costs of purchasing cash goods (see conditional example 2).

Conditional example 2

The buyer's expenses on the market for real goods (120 units), thanks to the income received from futures trading (20 units), did not exceed the amount of expenses he planned as of January 1 (100 units).

Both of these examples reveal the essence of the insurance hedging function.

Let us give two more examples (see conditional examples 3, 4) illustrating the hedging technique.

Conditional example 3.

Hedging by selling a futures contract ("short hedge")

A company produces a product (for example, aluminum) and sells it. The current price on the cash market satisfies the enterprise, but it is assumed that in 3 months the price may decrease and then the product will become unprofitable. To hedge against a possible price drop, the company sells a three-month futures contract for the supply of aluminum. Let's assume that the forecast came true. Cash and futures market prices declined.

After 3 months, the company sells its goods on the cash market and buys back its futures contract on the exchange.

Cash market

Price on May 1- 1000 thousand rubles. per unit of goods. Price as of July 25 - 800 thousand rubles. per unit of goods. 1. The company sells goods manufactured by this time at a price of 800 thousand rubles. per unit of goods.

Futures market

1. An enterprise sells a three-month futures contract at a price of 1,050 thousand rubles. per unit of goods.

2. An enterprise buys a similar three-month futures contract for 850 rubles. per unit of goods.

Hedging results

Revenue from the cash market is 800 thousand rubles. per unit of goods.

Profit on the futures market is 200 thousand rubles. (1050 thousand rubles - 850 thousand rubles) for each unit of goods.

The total revenue of the enterprise is 1000 thousand rubles. (800 thousand rubles + + 200 thousand rubles) for each unit of goods.

Conclusion. Despite the decrease in the market price for the goods, the enterprise, having hedged on the exchange futures market, received 1000 thousand rubles for each unit of goods, i.e., it received a price that suits the enterprise.

Conditional example 4.

Hedging by purchasing a futures contract - "long hedge"

A flour mill buys grain and produces flour from it. The current price on the cash grain market satisfies the flour mill, but it is assumed that in 3 months the price of grain may rise and then flour production will become unprofitable. To hedge against a possible increase in grain prices, the company buys a three-month grain futures contract. Let's assume that the forecast came true. Prices in the cash and futures markets increased. After 3 months, the company buys grain on the cash market at a new price and sells its futures contract.

Cash market

Price on February 1- 1000 thousand rubles. per unit of goods. Price as of April 25 - 1100 thousand rubles. per unit of goods. 1. An enterprise buys grain at a price of 1100 thousand rubles. per unit of goods.

Futures market

1. An enterprise buys a three-month futures contract at a price of 1,050 thousand rubles. per unit of goods.

2. The company sells this futures contract at a price of 1,150 thousand rubles. per unit of goods.

Costs on the real product market = 1100 thousand rubles. per unit of goods.

Profit on the futures market is 100 thousand rubles. (1150 thousand rubles - 1050 thousand rubles) for each unit of goods.

The total cost of purchasing grain is 1000 thousand rubles. (1100 thousand rubles - 100 thousand rubles) for each unit of goods.

Conclusion. Despite the increase in the market price for grain, the flour mill, having hedged on the exchange futures market, spent 1000 thousand rubles on each unit of goods, i.e. provided itself with a standard level of costs.

Using the mechanism of futures trading, as follows from the given conditional examples, allows sellers to plan their revenue, and therefore profit, and buyers - costs. In practice, it is difficult to predict price changes over the long term. The price dynamics of the real commodity and futures markets do not coincide, therefore, as a rule, hedging does not cover the entire mass of produced exchange goods.

There are different forms (methods) of hedging depending on who is its participant (dealing centers - DCs, enterprises, banks, etc.) and for what purpose it is carried out. Hedging can be carried out: for all available goods or for part of them: for available available goods or goods that are not available at the time of concluding a futures contract; for a combination of different dates for delivery of the actual commodity and execution of the futures contract, etc.

Hedging allows you to get additional profit. The average difference between the spot price and the futures contract price for the corresponding delivery month is the "basis" and depends on storage costs and other factors that are difficult to predict. In the case of hedging, a seller of a commodity who wants to make additional profit should seek to sell a futures contract for his commodity at a price that exceeds the current market price of the actual commodity by the amount of the basis. If in the future the basis decreases, then the hedger (i.e. the one who hedges) wins, since either the increase in prices in the futures market lags behind the increase in prices in the real market, or the decrease in prices in the futures market is ahead of the decrease in prices in the real market . If the basis increases, the hedger-seller loses. A buyer of a product who wants to receive additional profit bases his forecasts on a different change in the basis, i.e. when it increases, the hedger wins, and when the basis decreases, he loses.

In these options, the final price for the hedger is equal to his target price plus the change in basis.

Tsk = Tst + B

where Tsk is the final price for the hedger;

Ts - target price for the hedger;

B - change in basis.

If the hedger is a seller, then he will have an additional profit if the final price is higher than the target price. This is possible by reducing the basis.

Exchange trading participants carry out their activities in many directions at once, using all available types of futures contracts, options and their combinations. In this case, exchange price insurance occurs in general, i.e. insurance against changes in prices for futures contracts, options, etc., rather than insurance associated with changes in prices on the market for real goods. In this sense, not only the owners of real goods, but also stock exchange speculators begin to engage in hedging, and therefore the lines between hedging and stock speculation are blurred. Hedging is carried out in order to ensure additional profit from exchange transactions, and exchange speculation turns into a form of hedging.

In addition, hedging can be carried out using options transactions.

Any hedging transaction consists of two stages. On the first, a position on a futures contract is opened, on the second, it is closed by a reverse transaction. Moreover, with classical hedging, contracts for the first and second positions must be for the same product, in the same quantity and for the same month of delivery.

Good afternoon, dear readers of our site. Today we have a topic for investors - the technique of hedging risks in the market. I'll start from afar, perhaps. You probably understand perfectly well that the market provides endless opportunities for earning money.

At the same time, the uniqueness of this area lies in the fact that you can earn profit in the market in various ways. Some people trade directly on the market, opening appropriate transactions, while others invest their funds. There are also those who are in the market circle, and even make money from this.

Roughly speaking, they sell people their seminars, strategists, indicators and other crap. Who are these people? These are those who have not earned a penny from their trading activities; their main source of income is selling their junk. Unfortunately, this segment is very extensive, because the cunning people understand that there are many novice traders appearing on the market, who can hang a lot of noodles on their ears, and people will believe in everything.

One way or another, everyone has become a victim of such divorces. There’s nothing wrong with that, it’s an experience, albeit a bitter and unpleasant one, but an experience. The main thing in this regard is to draw conclusions and not step on the rake again. But, of course, our topic is different - hedging techniques.

Investing: risks and other importance

This term applies not only to the field of investing, but also to trading, but I would like to consider it from the point of view of investing, I think it will be more clear to you! In general, the scope of investing is very broad. Now there are a huge number of areas where you can invest your funds, and the hedging technique works everywhere.

Within Russia, the most popular way of investing at the moment is a bank deposit. Why? And the point lies in the simplicity, you don’t need to bother, just go to the bank and deposit money at interest. Are you risking anything in this case? Naturally you take risks, you must understand that the field of investment is a financial risk. Yes, you can minimize potential risks, but you won’t be able to completely avoid them, even if you really want to.

You need to accept the risk and make sure it is not excessive. You must understand that deliberate and conscious risk is the lot of noble people, thoughtless risk is the lot of fools. Therefore, it is always worth monitoring the risks. I think that you don’t need to be a rocket scientist to understand that there is some kind of relationship between risk and potential profits and losses.

Roughly speaking, the higher the risk, the higher the potential profit, but also the higher the potential loss. First of all, you need to choose a risk-to-loss ratio that suits you psychologically, and this is very important.

Now I will try to convey to you why this hedging technique is very important. In general, trading and smart investing are based precisely on psychology. Being an emotionally unstable person, you simply cannot follow your own rules. What can I say, significant losses can just unsettle a person, as a result, he will break a lot of wood.

Let's say a person has entered into a series of losses, and at one point he simply cannot withstand this stress and begins to throw away his funds in order to quickly work off all the losses. In fact, thoughtless actions of this kind lead to catastrophic losses.

Watch video review of the article

You must understand and accept losses, while ensuring that you do not take unnecessary risks. Choose for yourself the optimal level of risk that you are willing to put up with. Now let's talk about what hedging is and why it is needed.

Hedging is an activity aimed at reducing risks. In the stock market, this is an agreement to purchase a particular issuer at the current price in the future in order to protect itself from possible unforeseen price fluctuations. Let me now tell you about the history of hedging.

History of the phenomenon, modern example and conclusions

It all comes from Japan, where weather was of great importance to the agricultural sector. The harvest and, accordingly, the subsequent price of food, including rice, depend on it. All Japanese rice farmers wanted some kind of stability.

But all farmers and their consumers depended on the price of rice. They, clearly understanding that it is impossible to predict events that affect the price, decided to invent a method of insurance. Imagine that you are in Japan and grow rice. If the harvest is favorable, the price of rice will decrease; accordingly, if the harvest is not particularly good, the price of rice will increase.

Accordingly, to protect each other, the supplier and buyer agree that they will transact at the current price in the future, regardless of how the price of rice changes. In total, when the time for delivery comes, there may be three options for events.

The market price has become higher, so the farmer is not happy, because he could have sold the goods at a higher price, but the buyer, on the contrary, is happy. The second option is when the price has become lower, because the farmer is happy with it, but the buyer is not, because he could have bought it cheaper. There is a third option, when the price does not change, then they both remain at their own. Regardless of whether one of them is happy or dissatisfied, it doesn't matter, they still need to fulfill their commitment to each other.

Now let's look at a more realistic example of how to hedge. For example, you are a certain shareholder, and you believe that the shares of your company will increase in the future. But at the same time, you are afraid that the share price may decline a little in the short term, and you may try to hedge.

To do this, you can buy an option on your stock with the right to sell at a certain price. If suddenly your fears come true and the price drops below the agreed price in the option, then you will simply sell the share at this price, as this was previously agreed in the terms of the option.

In fact, there are many ways to hedge. I decided to tell you about this superficially so that you understand the essence. Hope this was helpful to you!

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:

1. 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.
2. 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.
3. 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 with futures contracts freezes the price of future delivery of an asset (commodity), and if the spot price (the selling price of a commodity 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.

A hedging strategy is a set of specific hedging instruments and methods of using them to reduce price risks.

All hedging strategies are based on the parallel movement of the slot price and the futures price, the result of which is the ability to compensate in the futures market for losses incurred in the real commodity market.

There are 2 main types of hedging:

1. Buyer's hedge - used in cases where an entrepreneur plans to buy a batch of goods in the future and seeks to reduce the risk associated with a possible increase in its price. The basic ways to hedge the future purchase price of a commodity are to purchase a futures contract on the futures market, purchase a call option, or sell a put option.

2. Seller's hedge is used in the opposite situation. Ways of such hedging include selling a futures contract, buying a put option, or selling a call option.

Let's look at the main hedging strategies.

1. Hedging by selling futures contracts. This strategy consists of selling futures contracts on the futures market in quantities corresponding to the volume of the hedged lot of real goods or less. Hedging using futures contracts fixes the price of future delivery of a commodity; Moreover, in the event of a decrease in prices on the slot market, the lost profit will be compensated by the Income on the sold futures contracts. However, there is an inability to take advantage of rising prices on the real market and the need to constantly maintain a certain amount of collateral for open fixed-term positions. When the spot price for a real product falls, maintaining a minimum amount of guarantee security is not a critical condition.

2. Hedging by purchasing a put option. The owner of an American put option has the right to sell the futures contract at a fixed price at any time. By purchasing an option of this type, the seller of the product fixes the minimum selling price, while retaining the opportunity to take advantage of a favorable price increase. If the futures price decreases below the option exercise price, the owner exercises it, compensating for losses in the real commodity market; if the price rises, he waives his right to exercise the option and sells the product at the highest possible price.

3. Hedging by selling a call option. The owner of an American call option has the right to buy a futures contract at a fixed price at any time.

The selection of specific hedging instruments should be made only after a detailed analysis of the needs of the hedger's business, the economic situation and prospects of the industry, as well as the economy as a whole.

The role of hedging in ensuring stable development is very important.

There is a significant reduction in the price risk associated with the purchase of raw materials and the supply of finished products; Hedging interest rates and exchange rates reduces the uncertainty of future financial flows and enables more efficient financial management. As a result, profit fluctuations are reduced and production controllability is improved.

A well-designed hedging program reduces both risk and cost. Hedging frees up a company's resources and helps management focus on aspects of the business in which the company has a competitive advantage, while minimizing risks that are not central. Ultimately, hedging increases capital by reducing the cost of using funds and stabilizing earnings.

Translated from English "hedge" means "guarantee", therefore, hedging in a broad sense can be called a certain set of measures that are aimed at minimizing 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 constant price for a certain period.

Currency risk hedging is a method of protecting finances from exchange rate fluctuations, which involves concluding transactions for the purchase and sale of foreign currency. It involves eliminating negative price fluctuations, which becomes possible due to the conclusion of forward transactions with the fixation of the current exchange rate at a particular moment. The ability to protect against unwanted fluctuations is a plus and a minus of the method, since insurance guarantees the safety of the asset, but does not provide profit.

In the Forex market, the hedging technique looks quite simple: opening a counter position to an already concluded trade, which is used if the trend reverses and the current trade becomes unprofitable. This means that the person she meets brings her income.

Thus, the trader enters into two transactions on one financial instrument of identical volume, but in opposite directions. One brings income, the second - loss. As soon as it becomes clear which position is profitable and the trend is clearly defined, the unprofitable one can be closed.

Basic principles of hedging currency risks, which is discussed in this article:

• The inability to completely eliminate risks, but the chance to make their level acceptable and non-hazardous
• When choosing methods and tools, it is necessary to take into account the level of possible losses and the ratio of benefits from the operations performed and the costs of their implementation
• Careful development of a program that involves improving hedging mechanisms for a specific account, enterprise, investor
• Taking into account conditions and context - in one case the chosen method will be an ideal option, in another it will be ineffective

Basic tools for conducting operations

Taking into account the fact that hedging is an operation for insuring funds, which involves fixing a price, it is not surprising that the main instruments in this case are options and futures, which are contracts to complete a transaction in the future at a predetermined cost.

After all, the main task is to eliminate the buyer’s risk of purchasing at an unknown price, and the seller’s risk of selling 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 mechanism for hedging both currency risks and others.

Full hedging in the futures market provides 100% insurance, eliminating the possibility of losses as much as possible. If they are partially hedged, only part of the actual transaction can be insured. The main advantages of futures contracts: minimum 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 purchase (insurance against a rise in price in the future) and sale (selling a real product to insure 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 volume of the underlying asset (a particular futures) before a specific future date. Options are futures contracts, and therefore their groups are the same.

Methods and types of hedging

Trying to minimize currency risk, they use the following hedging strategies:

• Classic strategy- appeared 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 contract, transactions were concluded with an option for the supply of goods at the cost of the primary contract.
• Direct hedging– the simplest method involves concluding a forward contract for the sale of an existing asset in order to fix the sale price for the period of its validity.
• Anticipating– allows you to protect assets before planning a transaction. By planning the operation and observing the appropriate price at the moment, you can buy a futures contract for the desired asset, thanks to which its current price will be fixed in the future.
• Cross – often used to protect a portfolio of securities. The method involves concluding a futures contract not for an asset that already exists, but for another, which is to a certain extent similar in price behavior. So, to hedge a portfolio that includes various securities, fearing that it will decrease in price, you can sell an option or futures contract on the RTS index, which is considered a barometer of the Russian market. The investor anticipates that if the portfolio declines in the market, then this will be a downward trend, so thanks to a short position on a futures contract, it is possible to slightly mitigate the drawdown.
• Hedging by direction– having long positions in the portfolio and fearing for a depreciation, an investor can dilute the portfolio with short positions in weak securities. Then, in the event of a general decline, short trades will bring profit, compensating for the loss on long trades.
• Intersectoral - when the portfolio contains assets of one sector, you can include in it long positions in assets of another sector, which will grow when the first ones decline. So, if the portfolio contains securities of domestic demand, in the event of a rise in the US dollar, you can insure them by including long positions in securities of exporters, which usually grow when the currency rate rises.

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