Hedging is an insurance process against financial risks associated with changes in prices for assets. Hedging allows you to “freeze” currency assets price rate for the period of time you need. For example, if you are hedging your funds, you will no longer have to worry about your funds if currency rate changes.
On the other hand, hedging does not allow you to make money on the difference in currencies – there are otherinstruments for this tasks.
How does it work?
For example in a month you are planning to make a deal to buy or sell assets. You want to freeze the current price of an asset or the currency with which a transaction will be made. With the help of hedging, you can “freeze” prices for yourself, even if you do not have the full value of these assets.
The first action is to contact the management company. It will calculate deal volume, choose a suitable brokerage company and help to take a profitable position in the market.
After taking a position, currency fluctuations of the market and changes in prices for the assets you are interested in will not affect transaction parameters. If the price of the assets changes are unfavorable for you, the market positions will bring you a profit that will compensate losses. If the asset prices change to your advantage, then market positions will be at a loss that compensates for that advantage.
You don’t lose anything – no matter how much the currency rates and asset values change, you will retain the price fixed in hedging.
In what situations is hedging necessary?
Hedging is necessary when you need to get rid of the risks associated with changes in asset value or currency.
Examples of situations where it is worthwhile to apply hedging:
- You buy or sell something in any foreign currency.
- You want to eliminate some of the risks in your business and “get attached” to a currency or basket of currencies other than the ruble. For example, your organization wants to keep capital in a basket of currencies: Swiss franc, euro and dollar.
- You are planning a deferred transaction and want to “freeze” the current prices for the future.
We recommend that you contact your management company so that you can focus on your business rather than risk analysis.