Hedging

Author: Patrick Dresdner
Patrick Dresdner
All publications of the author

The main feature of the modern economy is a wide range of fluctuation of prices for many types of goods. The consumer and the producer, on this background tries to create the most effective mechanisms that could act as a protective barrier for them in the period of sharp changes in the pricing policy and manage the risk. These mechanisms have the protection against the negative economic consequences for both sides. In the section "Compare CFD brokers", customers have the opportunity to get acquainted with a variety of offers in Forex market and choose the most favorable option.

In general, any sphere of activity is exposed to financial risk. This may be connected with the sphere of sales of manufactured products or investment in assets. In other words, any company in the process may face the fact that any trading will not bring the expected dividends or in general, the company will not get the income, but loss. Therefore, such a thing as a risk implies a possible loss and the possibility of exceeding profit. But most entrepreneurs, willing to give up the possible huge profits in order to minimize the risks of an unsuccessful outcome. Every experienced Forex broker must take into account all possible risks in their trading strategy and possess skills to use hedging in his work.

To help producers and consumers to minimize the risk of loss, special financial operations tools have been created: futures, forwards, options. The process of working with these tools has been named - hedging. Actually, hedging is a way to protect your activity against possible losses in the event of an unforeseen risk.

Self-determination of hedging, is quite impossible to explain without a definition of "risk".

So the "risk", the financial risk is a potential threat to loss of assets at unfavorable outcome of the operation.

Therefore, all financial instruments whether assets, financial flows are in the risk of possible depreciation in the event of a sharp decline or increase of prices. Such risks classification are divided into two types: interest rate and price. And in a separate category you need to include the possible risks of non-fulfillment of the contract (or individual points of the contract) of the parties. This risk category called a credit risk.

In a nutshell, the concept of hedging can be described as the use of one of the financial instruments (futures, forwards, options), to be able to reduce the risk that is associated with a possible unfavorable situation on the market. That is, the hedge could be a regulator in the pricing policy. Reliable binary options brokers are not only familiar with the concept of hedging, but also have a great experience working with this market relations tool.

Most often, the concept of hedging is used as the definition of insurance risk of possible changes in the value or price of the asset, the exchange rate or interest rate, when using derivatives. But this concept is defined only for financial risk hedging. To identify possible operational risks there is another definition. In fact, the financial risk is the risk that the market is subservient to the agent and his work under unfavorable  situation for him in the interest rate for foreign currency prices or prices for the products which it operates. Most of the financial risks are reinsured (hedged) due to the effectiveness of market systems, on which possible risk crouches in a single agent and is distributed evenly between all stakeholders. If you visit the Forex broker comparison section, note the positions indicating experience with hedging.

Hedging is a special strategy, the aim of which is the maximum reduction of the risk of unwanted features. It is in this connection, sometimes the result of manipulation is the probability of reducing the expected profits.Basically, income is the reverse side of a possible claim. For example, in a favorable outcome, in case the risk is not reinsured, income may be lost significantly and even several times higher, but at the same time the loss in this case, in many times more significant.

Before hedging as a tool for work, used strictly for the purpose of reducing the maximum priceof the risk of loss, but today, the purpose of such an operation as a hedge is not a reduction of risk, but also optimization of potential losses from a possible profit. PAMM Forex brokers rating provides an opportunity to choose a reliable broker, comparing his activities with the main part of brokers offering their services to customers.

Hedging mechanism is striving for the maximum balance of all cash market commitments, that is, balancing the value of goods, currency and securities. Also, hedging is aimed at balancing the directions of the futures market. So in order to minimize the possible loss of one particular asset, hedger may open a position in another asset, the profit from which, according to the hedger can be compensated in the event of loss of the first asset. Experienced brokers know how to minimize the risk of potential losses. And for those who do not know what criteria should be guided in choosing your broker, it will be useful to review the information contained in the section «How to choose a Forex Broker?».

Under the rules of the hedging cost is estimated based on the estimated losses in the case of hedge (insurance) is ignored. It is worth mentioning that the strategy, which is based on the use of random financial instruments used as an alternative, because it is able to guarantee lower costs with high market liquidity. If the customer is not familiar with the tools to work with a hedge, in the section "Most popular Forex ECN brokers" he can get detailed information about brokers and choose the candidacy based on required positions.

 

Let's recap this article in a video to help you understand hedging better:

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