In the global economy of the 70-80s of the last century, unprecedented instability was a common occurrence. Almost all products underwent price spikes. Any entrepreneurial activity was inextricably linked with a certain risk. In Spanish, the word "risko" refers to a cliff with a steep slope. Ozhegov in his vocabulary assigned a dual property to risk. Firstly, this is the expected danger, in contrast, risk was defined as an action in the hope of a happy outcome, randomness.
It was then that the beginnings of strategies aimed at risk management appeared.
To mitigate and eliminate financial risks , many methods and tools have been invented, collectively known as hedging. Hedging is insurance of risks in the field of financial activity, which is expressed by taking a position opposite to the asset in the market. Translated, "hedge" means "fence", "protection". Forex hedging is used in a wide variety of situations. Earnings on fluctuations in currency quotes and the value of securities involves a thorough study of the situation on 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, it is possible to 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. Options hedging is considered separately; option sellers widely use delta hedging in their practice.
In any hedging transaction, two steps must be completed. The first is opening a position under a futures contract, the second is closing it with a reverse transaction. The classic option for hedging is when contracts for both positions are concluded for the same product, for the same quantity, for the same delivery line (within a month).
Considering hedging by sale, it can be noted that this type of insurance involves the use of a short position in the futures market in the presence of a long position in the cash market. In this option, the price of the goods is protected at which it is planned to be sold. This method is widely used by sellers of real goods who want to protect themselves from falling prices. This type of hedging is used to protect stocks of goods or financial instruments that are not covered by forward transactions. A short hedge has found application in cases where it is necessary to protect the prices of products not yet produced or of purchase agreements under forward agreements.
Purchase hedging is carried out by the purchase of a futures contract by the owner of a short position in the market. As a result, the purchase price of the goods is fixed. This hedging protects against risks that may arise during forward sales at fixed prices, from surges in raw material prices, and is widely used in production at a stable price. Intermediary companies that have concluded transactions designed to purchase goods in the future, processing companies use this particular type of financial insurance.