1. Балабанов и.Т. «Риск-менеджмент» – Москва.: Финансы и статистика, 1997.

Hedging - the process of reducing the risk of potential losses. The company may decide to hedge the risks do not hedge or hedge something selectively. It can also speculate, whether consciously or not.

      The lack of hedging can have two reasons. In the first, the firm may not be aware of the risks or opportunities to reduce these risks. In - the second she can assume that exchange rates or interest rates will remain unchanged or change in its favor. As a result, the firm will speculate if its expectations will prove to be correct, it will win - if not, it will incur a loss.

      Hedging of risks - the only way to completely avoid them. However, financial directors prefer selective hedging. If they believe that exchange rates or interest rates change unfavorable for them, then hedge the risk, and if the movement will be in their favor - leave uncovered risk. This is, in fact, speculation. It is interesting to note that forecasters - professionals usually wrong in their assessments, but the employees of financial departments of companies that are "fans" continue to believe in your vision, which will allow them to make an accurate prediction.

One of the disadvantages of hedging (ie reduction of risk) are quite significant total cost of commissions and premium options. Selective hedging can be seen as one way to reduce overall costs. Another way - to insure risks after the courses or rates have changed to a certain level. We can assume that to some extent the company can withstand the adverse effects, but when they reached the allowable limit, the position should be fully hedged in order to prevent further losses. This approach avoids the cost of insurance risk in situations where exchange rates or interest rates remain stable or change in a favorable direction.

 The contract, which is for insurance against the risk of changes in currency prices, is known as a hedge (English - fence, fence).

The economic entity which carries out hedging, called "hedger".

There are two hedges:

 - Hedging to increase;

 - Hedging a fall.

Hedging to increase or buying hedge, is a stock transaction by purchasing futures contracts: forward or options. Hedge to increase applies in cases where it is necessary to hedge against a possible rise in exchange rates in the future. It allows you to set the purchase price (ie the exchange rate) is much earlier than the purchased currency.

      Suppose after 3 months will increase the exchange rate and the currency will need it in 3 months. To compensate for the anticipated growth in the exchange rate to buy now at today's price forward contract or option associated with that currency and sell it in 3 months at a time when the currency is purchased. Since the exchange rate and the associated change in proportion to fixed-term contract in one direction, then bought before the contract can be sold more expensive almost as much as the increase by the time the exchange rate. Thus, the hedger, to hedge on the increase, insures itself against a possible rise in the exchange rate in the future.

Hedging to reduce or selling hedge - this exchange transaction with the sale of fixed-term contracts. Hedger, to hedge a fall, plans to carry out in the future sale of foreign currency and, therefore, selling on the stock exchange forward contract or option, insures itself against a possible depreciation of the currency in the future.

      Suppose that the exchange rate at 3 months is reduced, and the currency to be sold in 3 months. To compensate for the expected losses from the depreciation of the hedger sells a futures contract today for a high price, and the currency sold in 3 months, when the rate fell to her, buys a futures contract at the bottom (almost as) exchange rate. Thus, a hedge used to decrease when the currency to sell later.

      Hedger seeks to reduce the risk caused by the uncertainty of currency movements on the market, by buying or sale of futures contracts. This gives the opportunity to fix the exchange rate and make gains or losses more predictable. The risk associated with hedging does not disappear. His take on the speculators, that is, market participants are going to a specific, pre-calculated risk.

      Hedging is produced primarily in the futures market. Hedger comes to the market to sell someone a share of the risk. The speculator is taking the risk to them, hoping to make a profit.

      Speculators in the futures market play a big role. Taking a risk in the hope of making a profit when playing on the price difference, they serve as a stabilizer of prices.

Speculators are not interested in the implementation of the delivery or receipt of specific type of goods (currency). The market attracts their expected price fluctuations. So they take certain foreign currency positions. The size of the party at the conclusion of futures contracts is small, and therefore the speculator has great freedom of maneuver. However, this freedom entails risk. An important aspect is the fact that usually the speculator operations involved in only one market. If the hedger can compensate for their losses in the futures market profit gained on the physical market, the speculator should be ready for possible losses on the futures market. When buying futures contracts on the stock exchange speculator makes a down payment, which is determined by the value and risk. If the exchange rate fell, the speculator who bought the earlier contract loses an amount equal to the guarantee fee. If the exchange rate rose, the speculator regains an amount equal to the guarantee fee, and receives additional income from the difference in exchange rates and purchased the contract.

      Risks associated with the transactions involving foreign exchange, can be managed by pricing policies, including the definition as prescribed level of prices and the currencies in which the price is expressed. A significant effect on the risk may have time for obtaining and paying money. In addition to the above actions to reduce operational currency risk company is also actively using the following method: account - invoice to the buyer the goods issued in the currency in which the payment for import.

However, these options are not always convenient for the buyer, or not really feasible.

      Specific methods of hedging include:

1) Forward foreign exchange transactions;

2) Currency futures;

3) Options;

4) Swap transactions;

5) The structural balance of assets and liabilities, accounts payable and receivable;

6) change the due date;

7) Loans and investments in foreign currencies;

8) A restructuring of the debt in the currency;

9) parallel to the loan;

10) Leasing;

11) Discounting of claims in foreign currency;

12) The use of a "currency basket";

13) Self-insurance;

   Let us consider how currency hedging in relation to practice. The traditional and most common form of currency hedging transactions is urgent (forward) transactions.

   A type of fixed-term contract is currency futures, which are traded at leading exchanges.

   Currency futures were first applied in 1972 at the Chicago exchange market. Currency futures - futures on the stock exchange, which is the purchase and sale of a particular currency at a fixed rate at the time of the transaction, with the execution after a certain period of time. Unlike the currency futures transactions on forward is that:

   1. Futures trading are standard contracts.

   2. A prerequisite futures is guaranteed deposit.

   3. Payments between the contracting parties through a clearing house for an exchange, which mediates between the parties and also the guarantor of the transaction.

   The advantage of the futures before the forward contract is its high liquidity and constant quotation on the exchange market. With futures exporters are able to hedge their transactions. Buying or selling currency futures to avoid possible losses arising from exchange rate fluctuations on transactions with customers.

Spot transactions in futures on the interbank market are all 12 months. Open positions from transactions with customers (forwards, options, swaps), banks typically hedge in the futures exchange market.

   The currency futures market hedger - someone who buys a futures contract

- Get a guarantee that in case of an increase in foreign currency in the spot market, he will be able to buy it at a more favorable exchange rate fixed futures transaction. Thus, the loss on spot transactions are compensated hedger profit on the futures exchange market for the appreciation of foreign currencies and vice versa. It should be noted as one unwritten law - the exchange rate in the spot market always has a tendency of rapprochement with the course of the futures market as we approach the date of a futures contract.

    * Another version of the futures contract is a swap deal. Swap transaction is the exchange of one currency for another at a certain period of time and is a combination of cash and spot transactions emergency striker. Both transactions are concluded at the same time with the same partner for pre-fixed rates. SWAP is used as a means to eliminate the risk of fluctuations in exchange rates and interest rates.

   Swap transactions are convenient for banks, as it does not create an uncovered foreign exchange position - the volume of claims and liabilities of the bank in foreign currency are the same. SWAP objectives are:

    -Acquisition of the necessary currency for international payments;

    - Implementation of the policy of diversification of foreign exchange reserves;

    - Maintain certain balances on current accounts;

    - Meeting the needs of the customer in a foreign currency, etc.

   To swap transaction is particularly active resorted central banks. They use them to temporarily bolster their foreign exchange reserves in the period of currency crises and foreign exchange interventions.

    * Currency option - a transaction between the buyer and seller exchange option that gives the option buyer the right to buy or sell at a specific amount of currency at the exchange rate within a specified time for the fees payable to the seller.

   Currency options are used when the option buyer seeks to hedge against losses related to changes in the exchange rate in a certain direction. Thus, the option contract is binding for the seller and is not binding on the purchaser.

   The peculiarity of the option, as an insurance transaction is the seller of the option risk that arises investigation transfer it currency risk exporter or investor. Not correctly calculating rate option, the seller runs the risk of incurring losses that exceed the premium received by it. Therefore, the option seller is always striving to understate its course and increase the premium, which may not be acceptable to the buyer. The advantage of using hedging option appears in full protection against unfavorable changes in currency exchange rates. The disadvantage is the cost of the payment of the option premium.

   To insure currency, interest rate and investment risks in recent years is also used by a number of new financial instruments: financial futures and financial options (options with securities), forward rate agreement, issuance of securities with additional insurance conditions, etc. These methods are insurance allow exporters and investors, burdened by competition in the markets for a fee to transfer currency, credit and interest rate risks of the banks, for which the assumption of these types of risks is a form of profit. Transactions with new financial instruments are generally concentrated in the world's financial centers due to the fact that the legislation in some countries has hampered their use. These methods of risk insurance today are very dynamic and have strong growth trends. The use of futures contracts to hedge risks in foreign trade also allows customers to more accurately estimate the final cost of insurance.

    * Hedging with a forward transaction is the mutual commitment of the parties to make a currency conversion at a fixed rate at a pre-agreed date. Urgent or forward contact - this obligation for the two parties (buyer and seller), ie the seller is obliged to sell, and the buyer is obliged to buy a certain amount of currency at a fixed rate on a given day. The advantage of a forward operation manifests itself in the absence of up-front costs and protect against adverse exchange rate fluctuations. The disadvantage is the potential loss associated with the risk of loss of profits. Forwards as a method of insurance against currency risks apply during the interest arbitration with forward cover.

   Interest arbitration - a transaction that combines the conversion (exchange) and depository operations with currency, aimed at making a profit from the difference in interest rates in each currency.

Interest arbitration has two forms:

    - No forward cover

    - A forward cover

Interest arbitration with the forward cover - is to buy currency at the current exchange rate and the subsequent placing it in the deposit and the reverse conversion of the current exchange rate at the end of the deposit term. This form of interest arbitration related to foreign exchange risk.

 Interest arbitration with the forward cover - is to buy currency at the current exchange rate, putting it in a term deposit and at the same time selling the forward rate. This form of interest arbitration does not involve exchange rate risks.

* Parallel loans are intercompany lending in local currency businesses and banks located in different countries. Both loans are granted at the same time. In fact this kind of loans are considered as spot transaction with the purchase of currency in terms of simultaneous spot and forward sales, but the period of the hedge can be more prolonged than was possible on the forward market transactions.

   Discounting of the claims in foreign currency is a kind of discount bills of exchange and is a demand assignment of the rights of foreign currency debt in return for immediate payment of the corresponding amount in the bank of the national (or other foreign) currency. Such operations are called forfeiting. In contrast to the ring-facto bank operations (in this case) takes notes in the amount and for a full term, taking care of all the commercial risks (including the risk of insolvency) without recourse (regression) of these bills for the previous owner. Unlike traditional accounting is forfeiting that is usually used in the supply of equipment for the large sums with prolonged delay of payments (from six months to 5 - years) and implies a guarantee (surety) of the bank.

    * The currency basket is the set of currencies, taken in certain proportions. If such a cart is used to hedging, in her chosen currency exchange rates are usually "floating" in opposite directions, one-balancing effects of its "floating", making the total cost of the entire "basket" is more stable.

    * Self-insurance is used by enterprises and banks independently and in parallel to other methods described above, the hedge. It is possible that the greatness of the loss from changes in the exchange rate in advance is included in the price (if the market conditions allow it to do so) and is used to form an insurance fund