Hedging of risks and ways of its implementation

The activity of any company operating on the financial resources market is associated with huge risks of losses due to sudden changes in market conditions. The behavior of the market is very difficult to predict in advance, besides, at any second it can be influenced by such factors as natural disasters, political conflicts and other troubles. Hedging of risks is used by players in the financial market in order to be able to hedge against loss. How this insurance is carried out, we will discuss in this article.

Hedging financial risks can take various forms depending on what the trader's goals are. One of the most primitive types of hedging is the opening of two differently directed transactions on one instrument - thus, the loss from the market movement, obtained by one transaction, is compensated by the profit from the same movement for another transaction. Naturally, this strategy eliminates not only losses, but also profits, thus significantly reducing both the riskiness and the effectiveness of activity in the market. A more complicated variant of this strategy is the conclusion of transactions with various instruments - for example, you can conclude a deal on the shares of a certain company and the stock index, which is also formed taking into account the price of acquired shares. Naturally, in order for the risk hedging not to take all the profits, the volume of the underlying transaction must exceed the amount of the counter-transaction. Thus, by reducing the level of profit at the first stage of the transaction, we also reduce its loss ratio until we are sure that the price trend has been established. After this, the safety transaction can be closed, thus increasing the profitability of the operation.

Hedging risks has other forms, the most popular of which is the conclusion of transactions with deferred performance contracts - the so-called forwards. Forward is a contract, which stipulates the price and the delivery time of the goods, which, as a rule, is six to twelve months from the date of the conclusion. Due to this, the parties agree in advance on the sale of goods on terms that satisfy their interests at the moment, and in the future they will not be worried about changes in the market price for the subject of the transaction. The first forward contracts concerned the supply of agricultural products, the price of which is subject to changes due to the impact of natural factors, and as a consequence, changes in the volume of the crop. The standardized type of forward contract is the so-called futures contract, in which the terms, delivery time and quantity of goods are set in advance by the rules of the exchange.

Hedging risks can also be achieved through the purchase of options. The option gives its buyer the right (not an obligation, as in the case of a forward or futures) to purchase or a certain amount of an asset after a certain date. This type of contracts is most beneficial for the buyer, since in the event that the use of option law will not be profitable for him, his loss will be equal only to the value of the option itself. In a winning situation there is also a seller - the value of the option is for him a kind of advance premium for the transaction, which, perhaps, will not take place.

Hedging risks is an integral part of the strategy of any exchange player. In a constantly changing market environment, playing on the stock exchange without risk insurance is like suicide, so countertransactions and operations with derivative financial instruments occupy a significant share among financial transactions around the world.