What is Hedge?

Hedge Cash Flow is a type of investment strategy established to protect an individual from the risk of variable cash flow a specific secured item. Such a risk may be caused by specific assets or obligations that generate revenue differently than expected, and may reduce expected profits or increase losses. For example, providing cash flows could protect the loan repayments with a variable rate, which increases the exchange rates of foreign currency in which the individual expects to perform a future transaction or increase the prices of planned purchases. This financial strategy uses derivative tools such as calling options or optics that help reduce the exposure to these risks. Specific information, such as the strategy and the risk of the original security, must be documented before it can be ensured by cash flows; In most cases, financial advisors can help investors create financial protection for hedged items.

Risk types

Generally, it is introduced to ensure cash flows to help protect against monetary risks, price risks or exposure the effects of financial tools of cash flows. Monetary risks include the risks associated with future foreign currency transactions or debt denominated in foreign currency. Price risks relate to the possibility of increasing the purchase price of non -financial goods or to reduce the sales price of non -financial goods. The fluctuating financial instrument dives could be caused by changes in price, comparative changes in interest rates, changes in the loan range between the interest rate provided by the item and the reference interest rate and the default values ​​or changes in participation.

Call versus Optics

Two common tools used to create cash flows are calls and put. Both options are legal agreements between two -mounts, buyers and sellers, and both allow the transaction to do without the requirementLy. The call option allows the investor to buy a predetermined amount of assets over a specific period of time from the seller, but the purchase is not mandatory. On the contrary, the PUT options are that the buyer of the PUT can sell the assets to the seller, in which case the seller is obliged to buy them, but the buyer is not obliged to sell if he decides.

For example, farmers suspect that wheat prices could fall in the near future, reducing the selling price of its further harvest. The farmer sets up securing cash flows by purchasing the possibilities of put on wheat futures, which would bring profits if wheat prices decrease. In this way, profits from PUT would compensate for losses from a reduced selling price if the price of wheat actually dropped. If the price of wheat increases, the farmer would lose the amount of money he used to buy options, but benefits from the more wheat price.

Qualification Investment

to qualify for cleaning fromThe hedge fund must meet certain criteria. At the beginning of the process of the original hedge fund, an individual who sets the investment must prepare documents stating their goal and strategy, as well as the method that will be used to determine the effectiveness of the investment. Investors must also provide details regarding the risk and date or period of time in which the cash flow would occur. Hedge cash flow must sufficiently balance changes in revenue related to the secured item. The transaction must be likely and must be performed with a different entity except the original hedge.