All of the stock market ► Hedging
The word "hedge" is derived from the English "hedge", which literally means "fence" or "barrier". Only the stock market, it is not a physical barrier, and financial techniques that can protect investor capital from unfavorable market conditions. In general, hedging transactions are intended to limit the financial losses and reduce risks.
For the practical implementation of such a strategy, it is necessary to combine an ordinary transaction and futures markets. Derivatives markets are, the inversion of so-called derivatives, or in other words, derivative contracts, ie futures and options. This contract for the supply of assets in the future at a fixed price in advance. They may be in tangible goods, such as - oil, natural gas, wheat or orange juice, financial assets - stocks, bonds, currencies, or completely abstract units such as - the weather or interest rates.
Throughout its history, humanity needed tools that allow to insure risks. The first hedging operations have been started many centuries ago. Japanese farmers have noticed that in good years the prices for their products lower than in the lean, so the inhabitants of the country, "Rising Sun" developed a method for the insurance of their risks. They began to negotiate the delivery price in advance, even before receiving the harvest. Thus, farmers could not pay attention to the vagaries of nature, and their buyers were not afraid to be left without the goods. To date, the most sophisticated hedging instruments are considered to futures and options contracts. The main difference between them lies in the fact that buying a futures contract, an investor directly pays the cost of goods and contracts, and buying a call option, it only pays for the opportunity to buy and sell the asset at a set price. By the time of expiry, ie termination of the contract, the investor will have to pay the agreed amount or lose the value of the option to abandon the deal.
Derivatives are treated in emergency sections of most of the world stock exchanges. There are the "classical" and "Cross" hedging. Classic hedging - implies the opening of transactions on the futures market, the opposite position to the normal site, that is, buying stocks to sell futures on them. With regard to cross-hedge, it implies the conclusion of a contract is not to the asset that is purchased in the spot market, and on any other. Thus, it is possible to build complex strategies based on completely different markets, with these types of insurance assets can be classified another way - as a "full" and "partial" hedging. The differences are clear from the title, full hedging - insurance assumes the entire cost of an asset, and "partial" - only its share.
Worth noting that along with a reduction in risk hedging and reduce the profitability of transactions, since on the one hand, if you insure your item, and they bring a loss, it overlaps the income that you received in the futures market. However, if the insured transaction will bring a profit, it will be smaller due to the loss on the futures market, and the more complete was the hedge, the greater the offset of profits and losses, so experienced portfolio managers insure only part of their positions.
Hedging in the futures market
Trading in futures and options can be a variety of purposes, for example, to diversify its portfolio, access to convenient speculative instrument, or to hedge their risks. The implementation of all these diverse tasks in the futures market deserves detailed consideration, but today we will focus only on one of them, Hedges - ie the insurance of their risks.
A case in point is, as transactions in the spot market, for example on the stock and on the retail trade, that is, on the operations of non-exchange directly. In addition, fixed-term contracts allow to insure risks related not only to the value of the underlying assets, but also to changes in exchange rates. In general, the futures and options allow you to use a variety of strategies designed to protect investments from various problems.
Participants in the derivatives market that use derivatives for different insurance risks are called "hedgers", let's take a closer look, the way they use the contracts to achieve their goals.
Hedging transactions are "short" and "long". "Short" hedging involves the sale contract, and "long" respectively purchase. The first way of the price changes are usually protected by the buyers of the goods, and the second way sellers. The essence of this approach is simple, if in a transaction, one party loses, as the seller of the asset, it benefits the buyer of the futures on the same amount of goods, and vice versa, so buyers are hedged real asset sale, and the seller is buying.
There are several hedging strategies: "normal", "arbitration", "selective" and "anticipates". "Normal" - is used for leveling of price risks, it is just a simple strategy involving transactions with futures contracts opposite transactions on the spot market.
"Arbitration hedzhirovnaaie" - is used to cover the additional costs. It is based on making a profit in a favorable change in the real price of the goods and the ratio of stock exchange quotations of contracts with different delivery times. Such operations are practiced mainly trading firms.
"Selective hedging" - suggests that the parameters of the futures contract differs from the transaction parameters. In this case, the purchase of a derivative requires only a partial coverage, and some speculative component.
Finally, the essence of "anticipatory hedging" - is the purchase or sale of a futures contract in advance of the transaction with the real goods. Such insurance serves as a temporary substitute for a trade agreement to be concluded later.
Hedging is a very important element in trading on the futures market. Derivatives can serve as a good tool when trading on the spot market, or doing business, not directly associated with the stock exchange. However, it should be understood that there is no perfect protection, futures contracts and in this respect, too, do not provide 100% guarantee. In addition, it is important to see where it ends and begins arbitration hedging or speculation.
The Russian market of derivative financial instruments is growing rapidly. Derivatives give investors plenty of opportunities to minimize risks and increase profits within a given strategy in the stock market. Depending on the investor's objectives, different options strategies can be used for hedging. The advantage of the hedge positions using options on the stock market, is their high liquidity and reliability, because the counterparty to each transaction performs calculation Exchange Chamber, as well as comparatively low overhead and transaction availability.
The easiest way to hedge open positions in shares on the spot market, the price drop with the help of option contracts, is to buy a Put option, or sell the option of Call, and the price increase - sales Put option. Call or buy option. When deciding on the hedging position is necessary to calculate the costs of each strategy, which include the option premium, not a percentage of the resulting opportunities to place their funds at interest without the risk on required dates, as well as dividends on the sale of shares. The market usually gives you the opportunity to choose the cheapest option, volatility and premiums in volatile days can reach up to 50%. With the help of option contracts an investor can hedge your position by asset price fluctuations in the short term, when the general trend of the market, whether it be an increase or decrease, no doubt. Such insurance is carried out by the so-called "reverse the spread", ie the simultaneous purchase and sale of an option of one type, but different strike prices. The investor has a portfolio of shares can hedge it with a set of option contracts for each type of securities. If the portfolio is made up of a large number of different stocks, the hedger is more convenient to insure the sale of its position Put option on a stock index. However, in this case, it should be remembered that the index allows a contract to hedge the market risk and leaves without the insurance of non-market risk. Insurance options contracts each particular stock as a hedge market and non-market risk. If necessary, to hedge long-term positions possible using the "roll" of practice. Its essence lies in the fact that since the beginning of the open positions closer contracts, and with the improvement of liquidity - for a further term of delivery positions near month closed and open positions on the remote.
Options allow with proper modeling and rendering all the components of the strategy to significantly improve the risk-earnings ratio, but there is also the danger associated with a parallel movement of prices and the underlying asset, and related derivative instruments. Basis risk is present with various of the law of supply and demand on the real and urgent markets. real and futures market prices may not differ too much, because in this case, there are arbitrage opportunities, which, due to the high liquidity of the derivatives market, almost immediately disappear.
Throughout its history, humanity needed tool allows you to insure risks. The term "hedging" is derived from the English word "hedge", ie, "to protect" is used to refer to a variety of risks insurance and investment methods…