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Financial Protection Or Hedge

Posted on the 19 December 2011 by Rodrigosucupira @rodrigosucupira

Financial Protection or HedgeHedge means exactly protection. Perform a hedge ina portfolio, means reducing the risk or volatility. It may be a foreign exchangeexposure, for those who export, for example, which can be reduced through futures contracts, options, swaps. Currently afinancial protection is actually quite available in the corporative environmentand may be mediated by various financial institutions.Performing the Hedge is to acquirecontracts with opposite exposures that are on the portfolio's underlying asset whichis unwanted oscillation. For instance, the portfolio can have a debt contractwith a U.S. bank (debt exposure in U.S. dollars) and dollar-selling future. This process reduces thehedge foreign exchange exposure and inserts time mismatches, because each contract, debt and derivativesare tied to time and future dates. The hedge is dynamic, that means thereneeds to be managed over time. The contracts are locked in a time interval. Matchingperfectly dates of the derivative positions in the portfolio you want to protectit is quite very difficult, which is called a perfect hedge.

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