Hedging is a real opportunity to hedge against risks!

In the world economy of the 1970s and 1980s, unprecedented instability was a common occurrence. Almost all products were subject to price hikes. Any entrepreneurial activity was inseparably connected with a certain risk. In Spanish, the word "risko" refers to a rock with a steep slope. Ozhegov in his dictionary risk attributed a dual property. First, this is the expected danger, in contrast, risk was defined as an action in the hope of a happy outcome, at random.

That's when the rudiments of strategies aimed at risk management appeared.

To mitigate and eliminate financial risks , many methods and tools have been invented, collectively referred to as hedging. Hedging is the insurance of risks in the sphere of financial activity, which is expressed by the occupation of the opposite of the active position in the market. In the translation "hedge" means "fence", "protection". Hedging for Forex is used in a variety of situations. Earnings on fluctuations in currency quotations and the value of securities implies 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 the technique of conducting, you can clearly distinguish two types of hedging. This is a short and long hedge. The first involves the sale of futures contracts, the second purchase of futures contracts. Separate consideration of hedging options, option sellers widely use in their practice delta hedging.

In carrying out any hedging transaction, you must complete two stages. The first is the opening of the position on the futures contract, the second is its closing by the reverse transaction. The classical option for which a hedge occurs is when the contracts for both positions are concluded for the same goods, for the same quantity, for the same supply lines (within a month).

Considering the hedging sale, it can be noted that this type of insurance assumes the use of a short position in the futures market if there is a long position in the cash market. In this variant, the price of the goods is protected, and it is planned to sell it. This method is widely used by sellers of real goods, which want to protect themselves from falling prices. Hedging of this type is used to protect stocks of goods or financial instruments that are not covered by forward transactions. A short hedge found itself in cases where it is necessary to protect the prices of products not yet produced or procurement agreements under forward agreements.

Hedging purchase is carried out by purchasing a futures contract by the owner of a short position in the market. As a result, the purchase price of the goods is fixed. Hedging protects against risks that may arise during forward sales at fixed prices, from jumps in raw material prices, is widely used in production with a stable price. Intermediary firms that have concluded transactions designed to purchase goods in the future, the companies-processors use this type of financial insurance.