1 Theoretical foundations of hedging as a way of financial risk management

1.1 The essence and the concept of the hedging

Hedges, it is "counter transactions", has more than a century of existence, it may seem strange - in fact the bulk of publications and scientific studies on the subject falls on the 80th and 90th years of the twentieth century. However, doubts that even in 1848, are traded on the Chicago Board of Trade futures contracts on grains could be used to offset market risks, it is not necessary. You can also say with certainty that the entire structure of the broadest in the market for financial derivatives owes its existence to the need for insurance of risks due to the presence of general market uncertainty. Of course, speculation, which has a number of features in common with the hedging which is not less than the objective nature, but still can not match the latest on the gross volume of deals. Modern derivatives market developed countries - a market hedgers rather than speculators. However, hedging remains to some extent, "the lot of the elect", and not only in Kazakhstan. This activity allowed only professionals of the highest caliber, and for good reason: the careless use of financial instruments can apply to "play with fire", and achieved effect will be opposite the expected. In fact, the decision to hedge in large corporate level can only take the risk manager or the CFO, who is directly subordinate to the Managing Director. That, however, is not a corporation insures against loss.

After all, the supreme director of Procter & Gamble, due to the complicated interest rate swap with the additional borrowing (levered swap), prisoner of Bankers Trust from November 2, 1993, led the company to more than two hundred millionth loss in 1994 and lost their seats. Although probably fair to write off the losses on account of the unprecedented increase in interest rates on five-year Treasury notes. Of course, the known and much more successful examples.

So, after a drop in oil prices in 1986 from 35 to 11 dollars per barrel, there is a situation in which the treasury of Texas, a quarter of which depends on oil duties, practically devastated. Size uncollected duties amounted to $ 3.5 billion. To this situation is not repeated in the future, tax revenue hedging program was developed with the help of options. All transactions were concluded on NYMEX (New York Mercantile Exchange). The operation started in September 1991, to hedge price was chosen at $ 21.5 per barrel (for the duration of the hedge - 2 years - the level of prices varied from $ 22.6 to $ 13.91 per barrel). hedging program was drawn up in such a way that a fixed minimum price of oil ($ 21.5 per barrel), and the state gets an additional profit when oil prices rise. This technique allowed the state government to receive a steady income for two years with significant fluctuations in oil prices.

There are many definitions of hedging. Although they are similar, it is reasonable to give some of them for more in-depth analysis of the nature of this process.

1) Hedging - is to use a single tool to reduce the risk associated with the adverse impact of market factors on the price of the other associated with the tool it, or to cash flows generated by them;

2) Hedging - a change in insurance risk asset prices, interest rates or the exchange rate with the help of derivative instruments;

3) Hedging - is the use of derivative and non-derivative financial instruments (the latter only in limited cases) for partial or full compensation for the change in fair value of hedged items, ie the protected financial instruments;

4) Single position on a financial instrument, which reduces the exposure to the total cash position of any of the risk factors is called hedging;

5) Hedging - the elimination of the uncertainty of future cash flows, which allows you to have a solid knowledge of the value of future earnings as a result of commercial activity

In official documents Futures US Trading Commission (CFTC - Commodity Futures Trading Commission) emphasized that this hedge must include positions in derivative contracts that are economically related to the cash (hedged) position and are intended to reduce the risks arising in the ordinary course of business of the company. Summarizing these definitions, it is possible to do 3 main conclusions:

A. Any asset, cash flow or financial instrument is exposed to the risk of impairment. These risks, according to the general classification, are divided mainly on price and interest. Separately, you can highlight the risk of non-contractual obligations (since the financial instruments are essentially contracts), called credit.

B. In order to protect against loss of money for a particular asset (instrument) to another position on the asset can be opened (instrument), which, according to the hedger is able to compensate for this type of loss.

C. This operation is called hedging.

However, it should be noted that in the modern interpretation of the concept of financial management of the hedge has a few more extensive and covers the entire set of actions aimed at eliminating or reducing risks with the nature of occurrence of the external sources. The same concept asserts that the use of financial derivatives for the purpose of risk management is convenient, but not necessary. Strive to use derivative contracts only because they are available - a rash decision; perhaps there is even more simple (and cheap) way. A lack of access to liquid derivatives (for example, on undeveloped markets), in turn, does not mean the collapse of the system of risk management.