Examples of hedging use

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An investor holding ruble stocks can hedge against the weakening of the ruble by buying a yuan futures contract in an amount equal to or partially equal to the value of his stock portfolio.

If the ruble falls, profits from futures may partially or fully offset losses. If the ruble strengthens, losses from futures may be offset by the ruble's appreciation against the yuan.

For insurance, various hedging methods are used. For example, pair trading. It consists of bolivia whatsapp phone number simultaneously opening positions to buy and sell two related assets. For example, a pair of shares or a share and a futures contract on it.

What hedging is in simple terms can be clearly shown by these examples :

A Russian company has entered into a contract in foreign currency for the purchase of products with a payment deferment of two months. If the Russian ruble falls during this period, it will have to make a payment in an amount greater than originally planned. To avoid losses, currency hedging is required. A forward is drawn up, stipulating the obligations of the parties to compensate for the difference in price in the event of a change in the exchange rate.
An investor who has invested in oil and gas company shares is concerned about a possible decline in the price of "black gold", which may negatively affect the value of his securities. You can open short positions on oil futures. In the event of a decline in quotes, the participant may incur losses on shares, but compensate for them at the expense of profits from futures contracts.


The difference between hedging and insurance
The insurance tool is clear to many, but what is hedging? In essence, it can be considered a form of insurance, in which participants, fearing the "bad behavior" of the underlying asset, insure themselves against possible losses. In this case, the selling party insures itself against a possible price decrease, and the buying party - against its increase.

That is, if the price goes down, the selling party will be able to compensate for its losses at the expense of the "hedged" profit. If the price goes up, the buyer will be able to make a purchase at the agreed price.

But there are still differences . When insuring, the parties enter into an agreement with the insurance company, which assumes responsibility and pays the insurance amount when an insured event occurs. In this case, the insurance premium is paid in advance, regardless of whether the insured event occurs or not.