Before the discussion on the use of hedge is not of this world, we must understand the role and impact reporting. In the modern history of futures trading in Chicago, started in early 1800 - Chicago is based in the Great Lakes region, the plants and animals in the U. S. West, which is a natural center for transportation, distribution and trade in agricultural products. Excesses and deficiencies of these products caused chaotic fluctuations in price. This led to the development of the market of grain merchants, processors, business and agriculture to trade contracts to isolate the risk and give them an opportunity.
The first commodity exchange was the creation of the Chicago Board of Trade CBOT in 1848. Since then, modern derivative products have more of the agricultural sector. Products also stock indices, interest rates, currency, precious metals, oil and gas, steel, as well as several others. The origin of the goods and Futures Exchange was designed to support. The role of speculators is useful to add trading volume and volatility is important because otherwise the small market and liquidity risks.
A bona fide hedging is someone with the products you can buy or sell. Hedging is the transfer of positions in the futures or commodity exchange, resulting in a fixed price for their products. Anyone who buys coverage are considered "long" and "to accept delivery. Someone sold accounts are called" short "or" surrender. "These elements, also known as" contracts are legally binding and apply to the Exchange.
Enter a trade or speculation or hedging being the broker or consultant on trade in commodities. And futures exchanges differ from the stock markets, although with the same directors. Various bodies such as the Board of Trade commodity futures, which are responsible for the regulation of retail brokers in the United States, but also as a consultant on trade for portfolio management.
Let's now a few examples from real life, hedge or reduce the risk of exchange-traded derivatives.
Example 1: The manager of the fund portfolio of $ 10 million, S and P 500 Index. Portfolio Manager believes that the economy is worsening deterioration of the economic benefits. In the next two to three weeks from the date of the quarterly corporate reporting. Until the report showed what the company had income of the poor, it is the result of short-term correction. Without the privilege of future research, not sure if the amount of income production. Now you have an impact on market risks.
The Director, in the opinion of their choice. The biggest risk is doing nothing, if the market falls, as expected, the risk is, until all past achievements. If you sell your portfolio early, but the danger of false and lacking in most of the rally. She also sells large additional brokerage fees to buy it later.
And he acknowledged a hedge is the best option for reducing risk in the short term. Please enter your CTA (Trade Advisor), and after a brief consultation of places selling a sum equivalent to $ 10 million of the S & P 500 index at the Chicago Mercantile Exchange CME. "As a result, is currently on the market, as expected, the losses are deducted in the results of portfolio coverage. If the report is that the result was better than expected, and his portfolio continues to grow, it becomes profitable.
Two weeks later, the fund manager calls his CTA and closes on the purchase of a new cover for the number of contracts at CME. Whatever the outcome of events in the market, Fund Manager protected during short-term fluctuations. There was no risk to the portfolio.
Example 2: ABC Electronics Company has recently launched a 5 million dollars of electronic components in the model for the future of foreign retailers in Europe. These components will be in 6 months, for two months after that. ABC to immediately realize the impact their two risks. 1. high and volatile prices of copper for 6 months, could lead to losses for the company. 2. fluctuations in currency, you can easily add to the losses. ABC is a young company can not cover losses due to strong competition in the market from others in that area. Losses from this order will lead to layoffs and closures may be.
ABC Phones of TCU and after a hearing on the two covers, like after 8 months at the time of delivery. Number 1 on the purchase of coverage to 5 million U.S. dollar for copper effectively locking in the price of today's rising prices. ABC eliminated all price risk. The threat of closing the plant more profit, that the continued decline in copper prices. In the end, ABC is not in the business speculating on copper prices.
# 2, respectively, short-sale reporting currency Euro Dollar U. S. ABC starting with the EU in payment, the increase in dollars - and the weak dollar and the EU will continue to undermine profits. As a result of hedging, which is not surprising, ABC, either in cash or copper levels. And without the risk of the transaction and full transparency of the result. With 8 months to complete and the customer takes delivery, ABC, at TCU, the coverage of copper on the sale and purchase of foreign currency to the euro contacts.
There are many examples in order to reduce the risk to the financial institution or a portfolio. New products are constantly created and the two counters and currency markets. It would be useful to a consultant or a broker of commodity trade, the analysis of rate risk management solutions, or a coating.
Coverage - What is it, and their use Risk Management
Labels: Global Market, Planning