(1) Long hedging:
1. can be exemplified. For example, an American manufacturer has a branch factory in Switzerland with an extra 500,000 Swiss francs, which can be temporarily used by the American factory (for example, six months), and the American factory needs a short-term fund at this time. The best way is to remit Swiss funds to the United States, let American factories use them for six months, and then return them. In this transaction, in order to avoid the exchange rate risk when the US dollar is exchanged for Swiss francs again in the future, the manufacturer can sell 500,000 Swiss francs in cash and buy Swiss francs for forward trading, so that there will be no risk of exchange rate fluctuation. This practice is long hedging.
2. 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 and futures francs are dominated by the same factors, both rising and falling.
3. The multi-head hedging method is applicable to importers and short-term debtors in international trade, with the purpose of preventing liabilities or coping with losses caused by rising commodity exchange rates.
(2) Short hedging:
1. We can give an example. 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.
2. It can be seen that American manufacturers can make an extra profit of 125 USD if they don't hedge, but the risk is great. Hedging is to give up the possible profits of a market and get price protection.
3. Short-term hedging is mainly used for receivables in international trade. If loans to foreign subsidiaries are paid in foreign exchange, short-term hedging can also be used to avoid or reduce losses caused by exchange rate changes.