What are the different types of securing tools?

Hedging is a technique to reduce exposure to measurable types of risk in the financial market transactions. It is a type of insurance, and although it cannot completely eliminate the risk, ensuring the effect can alleviate the effect. Correct locking tools will depend on the types of respective assets or transactions. For example, for a portfolio containing international investment, it would be reasonable to secure against unexpected currency movements to maintain the value of the portfolio in the domestic currency. The main types of securing tools include futures, options and forward - whether on one of the basic assets in the portfolio, in the monetary index or the asset negatively correlated with the portfolio. The possibilities are more flexible. A company or investor can buy the possibility of a "call" that is the right to buy an asset for a particular price or "put" the possibility of a Sell at a specific price on the date of the future date. Unlike futures, the owner owner is not obliged to monitor the transaction if the market price is more advantageous than the price of the option.

Hedging currency risk can be carried out with handover contracts, futures or possibilities. For a company with international operations, the use of monetary locking tools is very important in transferring foreign operations to domestic currency or purchasing inputs or facilities abroad. Forward contracts are unique to the foreign exchange market and allow a company or investor to lock a specific transaction to exchange one currency by one at a certain date.

Unlike futures contracts, the currency forward contract is not standardized or tradable, and if one side is extended, the other party is not entirely lucky. Futures contracts represent a less risky alternative to ensure the interim market fluctuations. Depending on the direction and quantity of volatility on the monetary market, the company will choose futures or options - or a combination of both - depending on the specific currencies involved.

Hedge nAnd the money market is another type of securing tool for a future currency transaction. For example, if a French company wants to sell equipment to Japan, it can now borrow in Yen and pay a denomination debt when a Japanese company pays for the products. This allows French companies to lock the current exchange rate between euro and yen. The cost is the interest rate of the Yen loan, which is lower than the cost of another locking tool.

One of the common uses of futures as a securing tool is when the company depends on a certain commodity to produce its products such as coffee beans. In order to protect the company from unfavorable movements included in the price of coffee beans, the company can decide to buy the future of coffee, D lock the specific price. The company is obliged to make a purchase even if the market price of coffee is lower than the contractual price. This is the risk of using futures as a hedge tool if the cost of price uncertainty is no greater than the cost of paying over market CEWell, if possible, the possibilities represent more flexible securing solutions.

All hedging tools and techniques include several costs. The first is the cost of the hedging tool itself. Second risk and related costs, if the selection of the hedging tool results in higher than market costs of the underlying asset. The use of hedging tools therefore reduces both the overall risk and return on the basic asset or business. For corporations, however, the value of ensuring the fluctuations of the monetary or commodity market with uncertainty is. This can allow smooth surgery and the ability to maintain prices consistent, which may be far from the cost of a hedge strategy.