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FUTURES HEDGING 2017

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NU Hotel

37 Jalan Thambipillay

Kuala Lumpur, Wilayah Persekutuan Kuala Lumpur 50470

Malaysia

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Financial risk management

Risk management has become a dominant factor in contemporary markets. As global markets develop and opportunities expand, so does the need for cautious, effective and intelligent risk management.

Our highly qualified staff will help you determine whether or how much of your portfolio needs hedging, the potential costs and benefits, as well as which financial instruments to use.



What is hedging?

Hedging is a way to ensure against financial risks via taking an offsetting position to the one in an asset.

As a result of geopolitical risks and uncertainties in global economic growth, prices fluctuations range on energy markets significantly expands. To protect against the risk of violent prices fluctuations, the practice of commodities hedging using energy derivatives becomes more and more popular. This includes OTC Energy Swaps (the financial instrument used for both speculation and hedging purposes, without intentions of physical delivery).

Using these instruments, the company focuses on the current price of the commodity and secures the commodity against price changes for the specified time period. This how, you can hedge against price increase, decrease, or both.



Why hedge?

  • To fix consistent and stable cash flows
  • To determine/ fix a sale/purchase price of a commodity
  • To reduce the existing cash position risk exposure

Thus locking in a price today allows for better focus on planning and business development with minimum exposure to an unwanted business risk and strengthening of competition.



Hedging strategies

Hedging involves the use of financial instruments, the most common of which are futures, options on futures, CFD’s and paper swaps. Hedging strategy is the combination of the specific hedging instruments and their methods of application to reduce price risks. All hedging strategies are based on the parallel movement of the spot and futures prices, the result of which is the opportunity to compensate on the derivatives market the losses incurred on the commodity market.


There are 2 main types of hedging:

  • Hedge of a buyer (long hedge, input hedge);
  • Hedge of a seller (short hedge, output hedge)

Hedge of a buyer is used when the entrepreneur is planning to purchase a batch of products at some time in the future and he is aiming to decrease risks related to the possibility of its price increase.

Basic methods of hedging the future purchase price of a product involve buying a futures contract, buying a “call” option or selling a “put” option.

Hedge of a seller is used when the entrepreneur is planning to purchase a batch of products at some time in the future and he is aiming to decrease risks related to the possibility of its price increase.

Basic methods of hedging the future purchase price of a product involve buying a futures contract, buying a “call” option or selling a “put” option.

Companies can use a variety of hedging strategies:

  • Full hedging;
  • Selective hedging;
  • Active hedging.


Full hedging: the position opened on the exchange or over-the-counter market is of the same volume and specification, but in the opposite direction with respect to the real commodity. It entirely hedges the risk of unfavorable price movement.

Selective hedging: hedging of the commodity by a similar, but not identical product at the exchange or hedging with the identical product, but not in full amount (leaving part of the commodity volume unhedged). Selective hedging requires constant market analysis and examinations of market trends and, as a consequence, it’s a more risky strategy than full hedging.

Active hedging: decision whether to hedge or not to hedge the specific commodity is made based on the current market situation, forecasts and the personal opinion. This is a very risky strategy.

The importance of hedging as a mean to assure the stable development of a company is very high:
It ensures significant reduction of price risk, related to purchases of raw materials and supply of end products; hedging of exchange rates reduces uncertainties of future financial flows and ensures more efficient financial management. As the result, fluctuations of profits get reduced and controllability of manufacturing improves.

Well-built hedging program reduces both risk and expenses. Hedging only diverts a tiny fraction of the company funds, allowing executive staff to concentrate on those business aspects where the company has competitive strengths, minimizing side risks. In the long run, hedging increases the company capital by means of lowering funds costs and stabilizing income.

Hedging does not overlap with common business transactions and allows to provide steady defense of the price without needs to change the stock reserve policy or to enter into long-term forward contracts.

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Location

NU Hotel

37 Jalan Thambipillay

Kuala Lumpur, Wilayah Persekutuan Kuala Lumpur 50470

Malaysia

View Map

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