What is foreign exchange hedging? What is the difference between hedging and hedging?

What is foreign exchange hedging? What is the difference between hedging and hedging?

The direct purpose of hedging is to avoid risks. It is also necessary for investors to make investment transactions more stable. However, novice investors, may not know much about the concept of hedging. This article will give you a detailed introduction to what hedging is and what is the difference between hedging and hedging.

What is foreign exchange hedging?

Foreign exchange hedging is the use of foreign exchange futures transactions to ensure that the value of foreign currency assets or foreign currency liabilities is not or less affected by changes in exchange rates. That is, using foreign exchange futures trading to ensure that the value of foreign currency assets or foreign currency liabilities is not or less affected by exchange rate changes.

To protect the income and lock the cost in the process of currency conversion or exchange, the practice of avoiding the risk of exchange rate changes through foreign exchange derivative transactions is called hedging. Foreign exchange forward contracts are one of the most basic financial derivatives for hedging. The advantage is that it is the cheapest way to hedge when the financial system is incomplete and operating inefficiently. The reason is that the transaction is relatively simple, no margin is required, the number of capital flows involved is small, and the company's decision-making method is concise.

The foreign exchange rate hedging methods can be divided into long hedging and short hedging. The long hedging method is suitable for importers and short-term debtors in international trade to prevent losses from rising foreign exchange rates for liabilities or payables. Short hedging is mostly used for receivables in international trade. For loans to foreign affiliates, if paid in foreign currency, short hedging methods can also be used to avoid or reduce losses caused by exchange rate changes.

From an accounting point of view, hedging is an enterprise designating one or more hedging instruments to avoid risks, so that changes in the fair value or cash flow of the hedging instruments are expected to offset all or part of the fair value or cash flow of the hedged item. Flow changes. Therefore, hedging is divided into three categories, namely fair value hedges, cash flow hedges, and net investment in foreign operations hedges.

Because of the existence of hedging costs, it will lead to incomplete hedging. The existence of a trading mechanism is one of the reasons for incomplete hedging. Hedgers will trade-off between transaction fees and hedging income, and will match between spot positions and futures positions. If the margin level is too high, The handling fee is too high and the hedging strategy cannot be adopted in time, or due to the constraints of the position limit in the futures market, the declared hedging quota cannot be met, and the hedging effect will inevitably be unsatisfactory.

The essence of hedging is to replace the larger spot price risk with a smaller basis risk. Therefore, the hedging strategy of the CSI 300 stock index futures contract cannot be completely hedged. It will also lead to an increase in the cost of hedging, and incomplete hedging is a natural phenomenon.

What is the difference between hedging and hedging?

1. Different purposes: First of all, it needs to be clear that hedging and hedging are two different professional terms in the futures market. Hedging is referred to as hedging, which refers to the use of the commonality of the futures market and the spot market to avoid risks. , the purpose of stable income.

2. Different profit and loss: Hedging simply means balancing profit and loss, and hedging transaction refers to two transactions in the market that are related to the market at the same time but in opposite directions and the same amount, and finally offset the profit and loss. Hedging is a kind of "unwinding".

3. Different norms: Hedging and hedging have similarities, both are ways of avoiding risks, but there are also big differences between the two. From the point of view of the object, the hedging is the spot medium and forward contract, and the object of hedging is the future spot price. Secondly, in terms of the effect of avoiding risks, hedging transactions are far inferior to hedging. Although hedging can also achieve risk aversion, it cannot achieve the purpose of hedging.

Regarding the issue of hedging, the mutual market introduces what hedging is and what is the difference between hedging and hedging. In short, hedging is to replace the larger spot price risk with a smaller basis risk. Although this concept is easy to understand, it is not easy to do it well. Investors need to practice more.