The term Kurssicherung or (short Hedging, of English ton hedge - with a hedge define themselves, secure against risks) designates a business for the security of a transaction against risks as for example rate of exchange fluctuations or changes in the Rohstoffpreisen. The person or enterprise, who would like to hedgen a business, for this purpose a further transaction is received, which is coupled with the which is the basis business. This usually takes place in the form of an option dealing. A perfect Hedge eliminates any risk, is however actually only theoretically possible.

Characteristics

The is the basis the intention, at present as acceptably felt price as for instance market prices of a security to specify the rate of exchange of a currency or a interest rate for the future.

leave themselves in principle both with stock exchange-acted instruments and Futures and options (often as portfolio insurance designation) and off-board in the over the counter so mentioned markets by means of non-standardized derivatives to furnish.

The success of the course safeguard business is based on a price-compensatory effect of the exchange rate fluctuations of the underlying transaction by an against-arranged commitment in the option market. If course direction and the extent of the course changes in Spot and/or Kassamarkt and option market agree complete, then the uncertainty lets eliminate over the future trend of prices of the underlying transaction completely by the income of an opposite standpoint in the option market. By a parallel movement of the date courses to the Spot and/or cash courses of a market article profits on exchange and Kursverluste resemble themselves therefore ideal-prove completely out.

Example

A European enterprise sells products into the United States. It closes today a contract and must end of the yearly of 10,000 pencils at the price of a dollar per pin supply. At the moment receives one per dollar a euro. The salesman of the pins gets 10,000 after today's rate of exchange thus "€. If the rate of exchange is because of the end of the yearly with 0,9 "€ (1.1 "€) per dollar, the salesman receives converted only to 9,000 "€ (11,000 "€). These 1,000 "€ loss (profit) does not originate from rate of exchange fluctuations and has with the actual business anything to do. This has certain balance-legal implications, which are not further to understand the business from interest.

In order to secure itself against these fluctuations, there are different possibilities. Two simple examples are presented here:

Safe rate of exchange

The enterprise can receive today a fixed rate of exchange and release therefore with security a certain amount.

By Futures the enterprise can sell today the 10,000 $, which it receives at the end of the yearly, to a certain course. This one calls Leerverkauf or short goes. The course of this Futures for dollar at the year end is for example 0.99 "€ per US Dollar. As the enterprise sells an appropriate number of contracts, it gets 9,900 from the business with security "€.

Minimum rate of exchange

The enterprise can secure a minimum rate of exchange by options and receives therefore a minimum amount with the possibility on increase.

She buys in addition an appropriate number of contracts with the right to sell at the end of the yearly 10,000 $ to the course of 0,99 "€. This option costs 100 "€. If the course is because of the year end with 1,1 "€, the option purges worthlessly and the enterprise receives 11,000 at the market "€ from the sales of the pencils. The business brings therefore 10,900 to the enterprise "€ - the money from the sales of the pencils, less the costs to the purchase of the option. If the course is because of the year end with 0,95 "€, the enterprise notices the right to the sales and receives by means of practice of the option 9,900 "€. The business brings therefore less the costs of the option 9,800 "€.

As this example clarifies, the possibility consists of making from uncertain future 10,000 "€ either safe today's 9,900 "€, or a combination of safe future 9,800 "€ and uncertain 11,000 "€. Another example of a hedge is on the English side to this topic.

For and against

As above described offers hedging certain advantages. It is not however under any circumstances like that that an enterprise from view of its owners should absolutely secure each business. Rather shareholders or partners have the possibility of securing that from the possession of the enterprise resulting Kapitalfluss thereby by diversifying their plants. Besides it is to be always noted for safeguard business that generally a trade off between risk and expected net yield is to be made. Therefore it applies that a risk then, and only then, to which capital market is to be delivered, if the costs are smaller hedging, as the self-carrying of the underlying risk. The moreover one securing of business at the option markets is extremely complicated. An example is the enormous loss of the metal company (today mg Technologies), for which from lack of understanding over received positions developed.

Hedge Accounting

An important aspect, which should not remain unconsidered with Hedge business, is their illustration relating to the balance, the so-called Hedge Accounting. The success effects, those are connected with the security require special regulations in the end-of-year procedure. For example the evaluation takes place with the employment of a perfect Hedges in the HGB according to the minimum value principle. The bank secured itself in the case against a risk of change of interest, each change of interest leads however to a loss.

Hedge Accounting forms in particular in the context of international accounting (international Financial reporting standard) one of the points of main discussion (this concerns above all IAS 39).

See also

Hedge fund

Related links

• Hedging with Futures

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