Methods of hedging transactions in financial markets. Hedging techniques: history and practice

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, it is impossible 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 only be made after detailed analysis the hedger's business needs, the economic situation and prospects of the industry, and 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 future uncertainties financial flows and provides more effective 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 company resources and helps management personnel 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 language "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) up to 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 back in Chicago on commodity exchanges when, due to the possibility of non-execution of transactions postponed for one reason or another, along with the contract, the transaction concluded 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 different securities, fearing that it will go down 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 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 is huge amount various methods and methods of hedging and, as statistics demonstrate, 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.

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 spot 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. But basis variability entails residual risk that is not eliminated by hedging.

There are two main types of hedging - buyer's hedge and seller's hedge.

Buyer's hedge is 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 methods of hedging the future purchase price of a commodity are purchasing a futures contract on the futures market, purchasing a “CALL” option or selling a “PUT” option.

Seller hedge is used in the opposite situation, i.e., if it is necessary to limit the risks associated with a possible decrease in the price of a product. Ways of such hedging are selling a futures contract, buying a PUT option or selling a CALL option.

Hedging relationships are divided into three types: fair value, cash flow and net investment hedges. foreign company(IAS 39 paragraph 137). This division is used in accounting in recognition procedures.

Fair value hedging. This hedges the risk of a recognized asset or a recognized liability (for example, changes in the fair value of fixed-rate foreign currency securities resulting from changes in market interest rates).

Cash flow hedging hedges the risk of cash flows related to:

– a recognized asset or liability (for example, future interest payments on foreign currency loans);

– an expected transaction (for example, an expected purchase or sale of currency);

– a firm agreement (for example, a contract for the purchase and sale of a tangible asset at a fixed price expressed in a foreign currency).

When hedging a net investment in a foreign company, risks associated with changes in exchange rates are hedged.

The purpose of hedging currency risk is to fix the future exchange rate. This will either completely eliminate or partially neutralize the risk of possible losses. Achieving this goal is possible by concluding a forward, futures or option agreement.

A forward foreign exchange contract is an agreement between two counterparties to fix the exchange rate relative to an agreed amount of currency at a certain date in the future in a purchase and sale transaction. In accordance with a forward contract, one of the parties agrees to deliver currency at the rate agreed upon on the date of signing, and the other agrees to accept the currency in the future by paying an agreed amount. Terms and amounts are determined by agreement of the parties.

Futures contract for foreign currency- this is an agreement between the seller (buyer) and the clearing house of the futures exchange about the sale (purchase) in the future of a standard amount of currency at the rate on the date of signing the agreement. The form of the contract is standardized, the terms and amounts are unchanged. You can only select the type of currency.

An option is an agreement that gives the option buyer the right (but not the obligation) to buy and sell a foreign currency at a rate fixed at the time of writing, for a specified period (American option) or on a predetermined date (European option) in exchange for an option premium. Moreover, the division into American and European has no geographical implications. Note that the issue of options must be registered with the Securities and Stock Market Commission (clause 1.5 of Decision No. 70). In this case, the buyer receives the right to choose and becomes the owner of the option. According to Decision No. 70, this person can be either an individual or a legal entity.

There is a sell option (put) and a buy option (call). The first gives the buyer the right to sell the currency or refuse to sell (this minimizes the risk of a decline in the exchange rate). And the second allows you to buy a currency or refuse to purchase (this allows you to avoid increasing prices for future assets).

A currency option is a unique trading instrument, equally suitable for trading (speculation) and for risk insurance (hedging). Options allow you to adapt the individual strategy of each participant to market conditions, which is vital for a serious investor.

Option prices, compared to the prices of other currency trading instruments, are influenced by a greater number of factors. Unlike spots or forwards, both high and low volatility can create profitability in the options market. For some, options represent a cheaper currency trading tool. For others, options mean greater security and accurate execution of stop-loss orders.

Currency options occupy a rapidly growing sector of the foreign exchange market. Since April 1998, options have accounted for 5% of the total volume. The largest hub for options trading is the US, followed by the UK and Japan.

Option prices are based on and are secondary to RNV prices. Therefore, an option is a secondary instrument. Options are usually referred to in connection with risk hedging strategies. Traders, however, are often confused about both the complexity and ease of using options. There is also a misunderstanding of the power of options.

In the foreign exchange market, options are available in cash or in the form of futures. It follows from this that they are traded either “over-the-counter” (OTC) or on a centralized futures market. The majority of currency options, approximately 81%, are traded OTC. This market is similar to the spot and swap markets. Corporations can contact banks by telephone, and banks trade with each other either directly or through brokers. With this type of dealing, maximum flexibility is possible: any volume, any currency, any contract deadline, any time of day. The number of units of currency can be whole or fractional, and the value of each can be assessed in either US dollars or another currency.

Any currency, not just those available in futures contracts, can be traded as an option. Therefore, traders can operate with the prices of any, even the most exotic, currency they need, including cross-prices. The validity period can be set to any amount - from several hours to several years, although generally the terms are set based on whole numbers - one week, one month, two months, etc. RNV operates continuously, so options can be traded literally around the clock.

Trading options on currency futures gives the buyer the right, but not the obligation, to physically own the currency futures. Unlike currency futures contracts, purchasing currency options does not require an initial cash reserve (margin). The option price (premium), or the price at which the buyer pays the seller (writer), reflects the buyer's overall risk.

An option that gives the right to buy an asset - a futures - is called CALL; an option that gives the right to sell a future is called PUT.

At any time the buyer ( holder) of the option can exercise it. In this case, a purchase and sale transaction of one futures contract is fixed at a price equal to the option exercise price, i.e. this means that the option is exchanged for a futures contract.

When a CALL option is exercised, the buyer of the option becomes the buyer of the futures, and the seller of the option becomes the seller of the futures.

When a PUT option is exercised, the buyer of the option becomes the seller of the futures, and the seller of the option becomes the buyer of the futures.

In addition to the ability for the buyer to exercise the option at any time, there is also the opportunity for both the buyer and seller of the option to close their position through a reverse transaction (as with futures).

For an option, a distinction must be made between the exercise price (strike price) and the price of the option itself (premium).

When concluding a contract, the option price ( prize) is always paid by the buyer of an option to its seller as compensation for the right to subsequently exercise this option. The option price is determined as a result of exchange trading.

Execution price ( strike) is the price at which an option gives the option holder the right to buy or sell the futures underlying the option; Strike prices are standard and set by the exchange for each type of option contract.

Let's look at some new terms that will further describe the option premium. The option price can be divided into two components:

Intrinsic value

Time value

Intrinsic value is also related to the concepts of an in-the-money option and an out-of-the-money option.

Consider the following example. We are the holder of a Call option on euros, with a strike price of 1.25, the current price on the market is 1.29 (contract size is 100,000 euros). This means that now It is profitable for us to exercise the option(in other words, taking advantage of the right that gives us the option to buy euros at 1.25, and immediately sell at 1.29). In this case, we will receive a profit in the amount of 100,000*0.04=4000. Actually, 4000 will be the intrinsic value of the option. Those. Intrinsic value can be non-zero when the strike price of the option is better than the current price in the market (and accordingly exercising an option is profitable), and the intrinsic value is 0 when the strike is worse than the current market price, for example, a Call option on the euro, with a strike of 1.35, at the current market price of 1.29, this is an option whose intrinsic value is 0. (and accordingly It is not profitable to exercise such an option at the current price of the euro)

In addition, an option that has an intrinsic value other than 0 is called - option in the money, and an option whose intrinsic value is 0 is called - out of the money option.

The time value of an option is the portion of the premium that is effectively the monetary value of the risk associated with the option. If the intrinsic value is easy to calculate, then it is almost impossible to calculate the time value more or less accurately. This is explained by the fact that its value is influenced by too many factors, the most basic are time and the value of the underlying asset, we will consider their influence, but besides them, the value of time value is determined by such factors as the expectations of market participants, the speed at which the underlying asset increases or decreases , market volatility, etc.

There are formulas for calculating the value of an option, but they are very approximate, and often the option price calculated using the formula differs very significantly from the actual price on the market.

So, let's consider the impact on the option price of two factors - time and the value of the underlying asset.

The dependence of the option value on time can be described by the curve in Fig. 3.2.

Rice. 3.2. Dependence of option value on time.

This curve suggests the following - the more time left before the option expires, the more expensive it will be, all other things being equal.

In addition, it is worth paying attention to the fact that in zone 2 (2 weeks or less remain until maturity), the fall in the value of the option accelerates. While the option is in zone 1 (more than 3 weeks until maturity), its value, under other constant conditions, decreases almost linearly, accelerating slightly as it approaches maturity. When moving to zone 2 (less than 3 weeks until maturity), the option begins to fall in price more and more quickly, and by the time the option matures, its value is almost zero.

Let's look at options hedging trading strategies used in the foreign exchange market, which are usually presented in the form of a chart called a break-even graph, which reflects the potential for profit. The break-even point or break-even point is used as the basis for constructing the diagram:

Basic strategies for buying PUT and CALL options will be illustrated using profit/loss charts.

Depending on whether a market participant buys or sells a call or put option, his profits or losses may or may not be limited.

Purchasing a CALL option is used to hedge risks associated with an increase in the exchange rate of a currency. In this case, the option buyer may incur a limited loss in the amount of the premium if the price does not exceed the strike level.

In the range between the strike and the break-even point, the loss decreases as the spot exchange rate rises;

Once the break-even point is exceeded, profits grow without limit as the spot rate rises.

The “Purchase PUT option” strategy is used to hedge risks associated with a possible depreciation of the currency exchange rate and is analogous to the sale of futures.

In this case, the buyer of the option may incur a limited loss in the amount of the premium if the price does not fall below the strike level.

If the price reaches the strike financial result the option behaves as follows:

In the range between the strike and the break-even point, the loss decreases as the spot exchange rate declines;

When the rate falls below the break-even point, profits grow without limitation as the spot rate declines.

Comparative characteristics of currency risk hedging instruments are given in Table. 3.2.

Buying shares and other financial assets, are worried about their future value and are afraid of unfavorable movements in the exchange rate. The simplest way to protect yourself in this case is to place a stop order to close the transaction (stop loss). But a stop loss is not always effective, since sometimes the price can “pierce” it a little, and then reverse, but without a trader. Much more in an efficient way is hedging. In essence, hedging is a risk management tool that allows, through the acquisition of one asset, to compensate for the possible unfavorable movement of another.

Fig.1. An example of a sharp downward price movement followed by a reversal.

Hedging is a lot like insurance. It’s not for nothing that this term comes from English. hedge - insurance. For a small fraction of the cost of the car, owners purchase insurance policies that entitle them to payment in the event of an unfortunate event. vehicle. The same is possible with the help of instruments for hedging financial risks when trading on the stock exchange. By purchasing an asset on an exchange, you can acquire the right to sell it in a certain volume before a certain date in the future for several times the cost less cost asset (like an insurance policy - cheaper than a car).

Risk hedging instruments

The most common instruments for hedging risks are derivatives market assets - futures and options, which are contracts to carry out a transaction in the future at predetermined prices. The buyer's risk is the unknown sale price, while the seller's risk is the unknown price of the subsequent purchase. And derivatives market instruments make it possible to determine this price in advance, making it possible to hedge both the investor’s long and short positions. Futures contracts are contracts that give a mutual obligation to buy/sell an asset at a certain date in the future at a pre-agreed price.

Futures are presented for various groups of assets: indices, stocks, bonds, currencies, commodities. Therefore, they allow you to hedge them.

The second group of derivatives market assets are options, and on domestic market options are presented specifically for futures contracts.

An option is the right to buy/sell a certain amount of an underlying asset (the corresponding futures) before a certain date in the future. Since options are futures contracts, their asset groups are therefore the same.

It is worth noting that not only derivatives market instruments are hedging assets. If there is a certain situation, other exchange-traded assets can serve the purpose of hedging.

How to learn to hedge using futures and options? Read our special, which contains many practical examples.

Basic hedging methods

1. Classic hedging appeared on the Chicago commodity exchanges. When, due to the risks of non-execution of transactions postponed for various reasons (for example, the delivery of wheat that has not yet grown on a certain date), together with the transaction contract, an option was concluded for the supply of this product at the price of the primary contract.
2. Direct hedging is the simplest method of hedging. Having a certain asset and fearing for its future exchange rate fate, the investor enters into a forward contract for its sale, thereby fixing the sale price for the period of the forward contract.
3. Anticipatory hedging can serve as a tool for hedging currency risks when planning a transaction. Planning the further implementation of the transaction and observing the appropriate value of the asset at the moment, the investor buys a futures contract for the specified asset, as a result of which its current value is fixed for a transaction in the future.
4. Cross hedging is often used to hedge a portfolio of securities. The essence of the method is to conclude a futures contract not for an existing asset, but for another, with a certain degree of similarity in trading behavior. For example, to hedge a portfolio consisting of many securities, if there are certain concerns about a possible decrease in its value, you can sell a futures or options contract on the RTS index, which is a barometer of the Russian market. Thus, the investor assumes that if the portfolio as a whole declines, the market will most likely also have a downward trend, so a short position on a futures contract on the index will make a profit, mitigating the portfolio drawdown.
5. Hedging by direction. If an investor has a certain number of long positions in his portfolio and is afraid of their exchange rate decline, the portfolio must be “diluted” by a certain amount with shorts on weaker securities. Then, during a period of general decline, shorts, which decline faster than long positions, will make a profit, compensating for the loss of longs.
6. Cross-industry hedging. If there are securities of a certain industry in the portfolio, they can be “insured” by including in the portfolio longs for securities of another industry, which is more prone to growth when the first declines. For example, a decrease in domestic demand securities when the US dollar rises can be hedged by including longs on exporters' securities, which traditionally grow when the value of the currency increases.

Now that you are familiar with the basic risk hedging tools, it's time to start learning strategies. And then try to apply them in practice.

Hedging is a method of reducing financial risk. It involves organizing a system for processing derivatives contracts and transactions, taking into account the possibility of changes in currency quotes. The main purpose of hedging is to prevent the adverse consequences of changes in exchange rates.

Hedging instruments

The choice of a particular hedging instrument depends on the objectives pursued. Depending on the type of instrument used in hedging, there are four mechanisms for reducing financial risk:

1.Using futures transactions- this is a method of neutralization possible risk for operations on commodity or stock market through conducting reverse transactions with a variety of options for exchange contracts. The mechanism for reducing risks through futures contracts is based on the fact that in the event of negative changes in the value of an asset at the time of delivery, the seller can compensate them in the same amount by purchasing contracts for an equivalent amount of assets and vice versa.

2. Using forward contracts. The main characteristics of forwards coincide with futures, however, the conclusion of forward contracts is personal in nature since this type of contract is not standardized. All essential points are determined by agreement of the parties. When hedging with forward contracts, changes in the parties to the transaction are not allowed without notifying the counterparty.

3. Using options is a mechanism for compensating risks for transactions with various assets. The action of this type of hedging is based on concluding a transaction with a premium (option), which is paid for the opportunity to sell or purchase, during the stipulated option period, something specified in the contract in a certain quantity and at a previously established price. In this case, the enterprise, at its own discretion, decides whether to make a purchase or sale or not, while the persons who have entered into futures contracts undertake to perform the action provided for in the contract.