hedging methods. Methods of hedging transactions in financial markets

Buying shares and other financial assets, are worried about their future value and are afraid of an unfavorable movement in the market value. The easiest way to protect in this case is to place a stop order to close the deal (stop loss). But a stop loss is not always effective, because sometimes the price can “pierce” it a little, and then turn around, but without a trader. Much more effective way is hedging. In fact, hedging is a risk management tool that allows, by acquiring 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. No wonder the term comes from the English. hedge - insurance. For a small fraction of the cost of the car, owners purchase insurance policies that entitle them to receive payment in the event of an adverse event with vehicle. The same is possible with the help of financial risk hedging instruments when trading on the stock exchange. By buying an asset on the exchange, you can acquire the right to sell it in a certain amount until a certain date in the future for a cost several times less than the value of the asset (like an insurance policy, it is cheaper than a car).

Risk hedging instruments

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

Futures are presented for various groups of assets: for indices, for stocks, for bonds, for currencies, for commodities. Hence, allow them to be hedged.

The second group of derivatives market assets is options, and in the domestic market, options are presented just for futures contracts.

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

It should be noted that not only derivatives market instruments are hedging assets. In the presence of a certain conjuncture, other exchange-traded assets may also serve as hedging purposes.

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

Basic hedging methods

1. Classical hedging appeared on the Chicago Commodity Exchanges. When, due to the risks of non-execution of transactions postponed for various reasons (for example, the supply of wheat that has not yet grown on a certain date), an option for the supply of this product at the price of the primary contract was concluded together with the transaction contract.
2. Direct hedging is the simplest hedging method. Having a certain asset and fearing for its future exchange rate, the investor enters into a fixed-term contract for its sale, thereby fixing the selling price for the period of the fixed-term contract.
3. Anticipatory hedging can serve as a tool for hedging currency risks when planning a deal. Planning further execution 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 the 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, with certain concerns about a possible decrease in its value, you can sell a futures or option contract on the RTS index, which is a barometer Russian market. Thus, the investor assumes that in the event of a decrease in the portfolio as a whole, 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 drawdown of the portfolio.
5. Directional hedging. If an investor has a certain number of long positions in the 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 the period of general decline, shorts that 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 longs on securities of another industry in the portfolio, which is more prone to growth when the first one decreases. For example, a decline in domestic demand papers when the US dollar rises can be hedged by including longs on exporters' papers, which traditionally grow with an increase in the value of the currency.

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

Hedging is a method of reducing financial risk. It implies the organization of a system for the execution of futures contracts and transactions, taking into account the possibility of changes in currency quotes. The main purpose of hedging is to prevent the adverse effects of changes in exchange rates.

Hedging Instruments

The choice of one or another hedging instrument depends on the goals pursued. Depending on the type of instrument used in hedging, there are four mechanisms for reducing financial risk:

1.Using futures transactions is a way to neutralize possible risk on operations in the commodity or stock market through the conduct of reverse transactions with a variety of options for exchange contracts. The operation of the risk reduction mechanism through futures contracts is based on the fact that in case 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 number of assets and vice versa.

2. Using forward contracts. The main characteristics of forwards are the same as 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, it is not allowed to change the participants in the transaction without notifying the counterparty.

3. With the use of options is a risk compensation mechanism for operations with various assets. The action of this type of hedging is based on the conclusion of a transaction with a premium (option), which is paid for the opportunity to sell or acquire within the specified option period specified in the contract in a certain amount and at a previously set price. At the same time, the enterprise, at its own discretion, decides whether it is worth making a purchase or sale or not, while the persons who have concluded futures contracts undertake to perform the action provided for in the contract.

A hedging strategy is a set of specific hedging instruments and how they are used to mitigate price risks.

All hedging strategies are based on the parallel movement of the "slot" price and the futures price, which results in the opportunity to recover losses incurred in the real commodity market in the futures market.

There are 2 main types of hedging:

1. Buyer's hedge is used when an entrepreneur plans to buy a consignment 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 the purchase of a futures contract on the futures market, the purchase of a call option, or the sale of a put option.

2. The seller's hedge is used in the opposite situation. Ways of such hedging are the sale of a futures contract, the purchase of a put option, or the sale of a call option.

Consider the main hedging strategies.

1. Hedging by selling, futures contracts. This strategy consists of selling futures contracts in the futures market in an amount corresponding to the volume of the hedged batch of real goods or less. Hedging with futures contracts fixes the price of a future delivery of a commodity; at the same time, in the event of a decrease in prices on the “slot” market, the lost profit will be compensated by Income from the sold futures contracts. However, there is an inability to take advantage of rising prices in the real market and the need to constantly maintain a certain amount of collateral for open futures positions. When the spot price for a real product falls, maintaining the minimum margin is not a critical condition.

2. Hedging by buying 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. Having bought an option of this type, the seller of the goods fixes the minimum selling price, while retaining the opportunity to take advantage of the price increase that is favorable for him. When the futures price drops below the strike price of the option, the owner executes it, compensating for losses in the real commodity market; when the price rises, he waives his right to exercise the option and sells the commodity 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 choice 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, and the economy as a whole.

The role of hedging in ensuring sustainable 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; interest rate and exchange rate hedging reduces the uncertainties of future financial flows and provides more effective financial management. As a result, fluctuations in profits 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 staff 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, reducing the cost of using funds and stabilizing returns.

A hedging strategy is a set of specific hedging instruments and how they are used to mitigate price risk.

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 recover on the derivatives market the losses incurred on the real commodity market. But the volatility of the basis entails residual risk that cannot be eliminated by hedging.

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

The buyer's hedge is used when an entrepreneur plans to buy a consignment 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 buying a futures contract on the futures market, buying a "CALL" option, or selling a "PUT" option.

The seller's hedge is used in the opposite situation, i.e., if necessary, to limit the risks associated with a possible decrease in the price of the goods. Ways of such hedging are the sale of a futures contract, the purchase of a "PUT" option, or the sale of a "CALL" option.

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

Fair value hedge. In this case, the risk of a recognized asset or a recognized liability (for example, changes in the fair value of fixed rate foreign currency securities due to changes in market interest rates) is hedged.

In a cash flow hedge, 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 a currency);

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

When hedging a net investment in a foreign company, the risks associated with changes in foreign 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 in the case of a forward, futures agreement or option.

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

A futures contract for foreign currency is an agreement between the seller (buyer) and the clearing house of the futures exchange on the sale (purchase) in the future of a standard amount of currency at the exchange rate on the date of signing the agreement. The form of the contract is standardized, 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 foreign currency at a fixed rate at the time of signing for a certain period (American option) or at a predetermined date (European option) in exchange for an option premium. Moreover, the division into American and European does not have a geographical connotation. Note that the issue of options must be registered with the Securities Commission and stock market(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, it can be both an individual and a legal entity.

A distinction is made between a put option and a call option. The first gives the buyer the right to sell the currency or refuse to sell (this minimizes the risk of a depreciation in the exchange rate). And the second allows you to buy a currency or refuse to buy (this avoids raising prices for future assets).

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

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

Currency options occupy a rapidly growing sector of the foreign exchange market. Since April 1998, options occupy 5% of the total volume on it. The largest option trading center 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 commonly referred to in connection with risk insurance strategies. Traders, however, are often confused about both the complexity and ease of use of options. There is also a misunderstanding of the possibilities of options.

In the foreign exchange market, options are available for cash or in the form of futures. From this it follows that they are traded either “over the counter” (over-the-counter, OTC), or on a centralized futures market. Most of the currency options, approximately 81%, are traded OTC. This market is similar to the spot and swap markets. Corporations can contact banks by phone, 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 term of the contract, any time of the day. The number of currency units can be integer or fractional, and the value of each can be estimated both in US dollars and in 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, the most exotic currency that they need, including cross-prices. Any validity period can be set - from several hours to several years, although basically the terms are set, focusing on whole numbers - one week, one month, two months, etc. RNV works continuously, so options can be traded literally around the clock.

Trading options on currency futures gives the buyer the right, but does not impose the obligation, to physically own the currency futures. Unlike futures currency contracts, you do not need to have an initial cash reserve (margin) to purchase currency options. The option price (premium), or the price at which the buyer pays the seller (writer), reflects the overall risk of the buyer.

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

At any time, the buyer holder) of the option can exercise it. In this case, a transaction for the purchase and sale of one futures contract is fixed at a price equal to the strike price of the option, 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 possibility for the buyer to exercise the option at any time, there is also the possibility for both the buyer and the seller of the option to close out their position by reversing the transaction (as with futures).

For an option, one should distinguish between the strike price (strike price) and the price of the option itself (premium).

At the conclusion of the contract, the option price ( premium) always pays the buyer of an option to its seller as a reward for the right to exercise this option in the future. The price of an option is formed as a result of exchange trading.

Exercise price ( strike) is the price at which the option entitles the holder of the option 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 be used to describe the option premium. The price of an option 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 a call option holder for euro, with a strike of 1.25, the current market price is 1.29, (the contract size is 100,000 euros). This means now it is profitable for us to exercise the option(in other words, by exercising the right that gives us the option to buy the euro at 1.25, and immediately sell it at 1.29). In this case, we will receive a profit of 100,000*0.04=4000. Actually 4000 will be the intrinsic value of the option. Those. the intrinsic value can be non-zero when the option strike is better than the current market price (and therefore exercising an option is profitable), and the intrinsic value is 0 when the strike is worse than the current market price, for example, a Euro call option with a strike of 1.35, with the current market price of 1.29, this is an option with an intrinsic value of 0. (and accordingly it is unprofitable to exercise such an option at the current price of the euro)

Also, an option that has an intrinsic value other than 0 is called - cash option, and an option with an intrinsic value of 0 is called - out-of-the-money option.

The time value of an option is the part of the premium that is actually the monetary value of the risks associated with the option. While intrinsic value is easy to calculate, it is next to impossible to calculate 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 the time and cost of the underlying asset, we will consider their influence, but in addition to them, the value of the time value is determined by such factors as the expectations of market participants, the rate at which the underlying asset increases or falls. , market volatility, etc.

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

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

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

Rice. 3.2. Time dependence of option value.

This curve says the following - the more time remains until the expiration of the option, the more expensive it will cost, 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. As long as the option is in zone 1 (more than 3 weeks to maturity), its value, under other constant conditions, declines almost linearly, accelerating slightly as it approaches maturity. When moving to zone 2 (less than 3 weeks to maturity), the option starts to become cheaper more and more quickly, and by the time the option is redeemed, its value is almost zero.

Consider 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 zero profit level (break-even point) is used as a basis for constructing a chart:

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

Depending on whether a market participant is buying or selling a call or a put, his profits or losses may be capped or unlimited.

The purchase of the "CALL" option is used to hedge the risks associated with the appreciation of the currency. In this case, the buyer of the option can 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 currency rate rises;

Once the breakeven point is exceeded, profits grow without limit as the spot rate rises.

The PUT option purchase strategy is used to hedge risks associated with a possible depreciation of the currency and is analogous to selling a futures contract.

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

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

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

When the exchange rate falls below the break-even point, profit grows without limit as the spot rate decreases.

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

Insurance (in the form in which all people know it) is one of the most popular services. We insure against fires, theft of personal property, against natural phenomena and so on. The investment world also has its own insurance, but here a different, more specialized term is used - "".

What it is?

The essence of hedging

To understand the basic essence of investment insurance, let's look at a simple example. You bought a certain volume of oil products for its further resale. Naturally, sell it immediately and to the maximum favorable price Not sure it's going to happen. In such a situation, the only way out is to sell futures contracts for it. After the oil products have been sold on the real market, they can be bought back. What happens if prices for petroleum products fall in the real market? You will, of course, incur losses. If prices in the real market, on the contrary, have increased, then you can count on additional profit and compensation for your costs. Thus, income in one market is able to cover a losing trade in another. In turn, the consumer of raw materials can also be insured. For example, he knows that the goods will be needed after some time. Naturally, its cost for a specific period may increase and a person wants to insure against this. How to act? All that is needed is to buy futures contracts with the position of the month when the purchase will be made. After the purchase of the real goods, the contract can be liquidated. The real and futures markets are closely related. Do not be surprised that the cost of futures contracts and real goods is different - this is a common occurrence. There is no perfect hedge. But if you timely correlate the futures and real prices, you can achieve an almost perfect result and minimal risks. The higher the value, the better for the investor. Of course, there are always risks that the change in the cost of the goods cannot be fully compensated by futures prices. But the main goal is to reduce risks, and it will not be difficult to realize it.

short and

You must remember that there are two main stages in any trade that uses hedging. On the first one, the main task is on a futures contract, and on the second one, to close it with a reverse deal. And most importantly, contracts for both positions should be opened for one product, with the same quantity and for the same delivery time. If hedging is classified according to the technique of conducting a trade transaction, then two main types can be distinguished:

1) Sell hedging. In this type of insurance, those market participants who have a long position in the real market must use a short position in the futures market. This method of protection is intended for sellers who want to protect the price of their products. It is very effective when it needs to protect financial instruments (securities) or commodities not covered by forward contracts. But this species hedging must begin with the sale of a futures contract, and end with a purchase.

2) Hedging by buying. Here we are talking about the opposite nature of the transaction. Market participants with a short position in the real market must purchase a futures contract. In such a situation, it allows you to fix the cost of the goods at the same level and protect yourself from further growth in its price. This type of insurance is used in great demand from intermediary companies that work with large volumes of orders for the purchase of goods after a certain period of time. Buy hedging is also relevant for processing companies. Transactions in the futures market allow you to temporarily replace and thus protect against a sharp increase in price.