Risk management practices
To reduce the degree of financial risk are different ways: diversification, acquisition of additional information limitation, insurance.
Diversification is the process of allocation of invested funds between investment objects that are not directly related. Based on the principle of diversification of activities of investment funds that sell their shares to customers, and the proceeds invested in various securities acquired by the Fund in the market and provide a steady income. Diversification to avoid the risk of the allocation of capital between the different activities.
Limitation - is the limit, ie maximum amount of expenditures, sales and credit. Limitation is an important means of reducing the risk and used by banks when granting loans, signing a contract for an overdraft, actors - the sale of goods on credit (credit cards), the traveler's checks and Eurocheques; investors - when determining the amount of capital investment.
Insurance arises from the fact that the investor is willing to give up the revenue side, just to avoid the risk that willing to pay for reducing the risk to zero. In fact, if the cost of insurance is important damage, investor, risk-averse, wants to insure so as to ensure full compensation for any financial loss.
For insurance is characterized by:
• the purpose of the established monetary fund spending its resources only to cover losses (assistance in specific cases;
• probabilistic nature of the relationship, because it is unknown when it's responsible event, what will be its strength and from whom it will affect policyholders;
• repayment of funds, because these funds are intended for the payment of damages from all insurers, not everyone.
While insurance is a redistribution of funds between the parties to create an insurance fund: damages one or more insurers carried out by distribution losses at all. The number of policyholders who have made payments over a given period, more than the number of those who receive a refund.
Widely used method of insurance price risk through opposite deals with various kinds of exchange contracts. This method is called hedging.
Hedging - the purchase and / or sale of derivatives (options and futures) in order to reduce the risk of potential losses from future exchange transactions.
Hedging can be seen as the conclusion of the system of fixed-term contracts and agreements, taking into account the likely future changes in exchange rates, and aims to avoid the adverse effects of these changes. In Ukraine, the hedge is regarded as insurance against the risk of unfavorable changes in prices of all commodities and materials contracts and commercial operations involving supply (sale) of goods in the future. *
Hedges on the rise, or buying hedge, is a stock-market operations to buy futures contracts or options. Hedge to increase applies in cases where it is necessary to hedge against a possible rise in prices (rates) in the future. It allows you to set the purchase price of a lot sooner than you purchased the real goods.
Hedging for a fall, or selling hedge - it exchange transaction with the sale of fixed-term contract. Hedger, hedges on the decline, suggests in future sale of goods, and therefore, selling on the stock exchange futures contract or option, insures itself against a possible decline in prices in the future.
Hedging can be performed with a currency option, and through the forward deal.
Currency option - it is the buyer's right to buy and the seller's obligation to sell a certain amount of one currency in exchange for another at a fixed rate to a pre-agreed date or within the agreed period.
Thus, the option contract is binding for the buyer. The company buys the currency option, which gives it the right (but not the obligation) to buy a certain amount of currency at a fixed rate on a specified date (European style).
Forward operation is the mutual commitment of the parties to make a currency conversion at a fixed rate to a pre-agreed date.
Urgent, or forward, the contract - is an obligation for both parties (seller and buyer). The seller is obliged to sell and the buyer to buy a certain amount of currency at a fixed rate on a given day.
The advantages of forward transactions occur in the absence of preterm costs and protection from adverse changes in currency exchange rates. A disadvantage is the potential cost of the risk of lost profits.
Derivatives market, whose instruments are used to reduce the financial risk is one of the fastest growing segments.