Hedging is to establish a hedging mechanism between short-term and long-term to minimize the price risk.
Foreign exchange hedging is applied to foreign exchange hedging according to the decision-making procedures and methods of hedging in commodity futures. In other words, forex futures trading is used to ensure that the value of foreign currency assets or liabilities is not or less affected by exchange rate changes. The specific way is: on the basis of spot or forward foreign exchange transactions, in order to prevent losses, at the same time do a transaction in the opposite direction. In this way, if there is a loss in the original transaction, hedging (that is, transactions in the opposite direction) can benefit and make up for it; Or both the hedging loss and the original income offset. So hedging can also be called hedging transaction.
The hedger lost $65,438+0,500 in the spot market, but earned $65,438+0,950 in the forward market, which was enough to make up for his loss, and was an extra $450.
American manufacturers first sell in the spot market, buy in the futures market, then buy in the spot market and sell in the futures market. This is the principle of equivalence. Only in this way can the losses in one market be compensated by the profits in another market. The secret is that the price changes of spot francs and futures francs are all dominated by the same factors, with ups and downs.
The long hedging method is applicable to importers and short-term debtors in international trade, with the purpose of preventing losses caused by the rise of foreign exchange rate of liabilities or commodities payable.
Short hedging can be illustrated by examples. For example, an American manufacturer has a branch in Switzerland, and it is in urgent need of funds to pay the immediate expenses. After half a year, due to the arrival of the purchasing season, the financial situation will improve. The American factory just had extra money for the Swiss factory, so it remitted 300 thousand Swiss francs. In order to avoid losses caused by future exchange rate changes, on the one hand, buy Swiss francs in the spot market; On the other hand, it sells the same amount of Swiss francs in the futures market. This practice is short hedging.