“Hedging” in English means cover or protection. Hedging management is closely related to risk management. It limits on the one hand the potential losses induced by fluctuations in foreign exchange rates, the commodities (raw materials) or interest rates and, on the other hand, it can predict the liquidity issues of market (liquidity or cash risk).
Its goal is therefore to reduce the income share possibly at risk in an investment while retaining significant value performance. Hedging management can benefit to large companies, managers portfolios or individual investors. It’s an ideal risk management method for a client wishing to enjoy as much as possible of its investments while limiting potential weakening in losses or gains enervation.
Hedging Management and Regulation
Hedging management can ben split into in two main aspects: management and regulation.
The “management” aspect of hedging management happens as follows:
Treasurers of a company who want to cover a risk will treat roofing products in the markets. In markets, treasurers can: borrow, issue debt, invest, buy future contracts, derivatives in the broad sense… They will mainly cover rate / foreign exchange risk, stocks / commodities risk, liquidity risk and credit risk.
On organized or stock markets, all types or risk are represented, and the treasurer can choose the so called standardized derivative or optional contracts. On the Over The Counter market, the treasurer can also cover all types of risks, but through non-standard contracts, since it will have in front of him a counterpart and not an organized market.
Among the derivatives, futures derivatives (certain realization) are commonly distinguished from optional derivatives (production conditions).
The treasurers work with dedicated tools called TMS (Treasury Mangement System), such as Treasury Line, which covers a large instrumental scope, to manage all the financial operations and associated risks.
The second feature of hedging management is “regulation”.
Regulation decrees to make IFRS or IAS hedges verifications. “IFRS”, which stands for “International Financial Reporting Standards”, are the European standards of financial information to standardize the presentation of accounting data internationally exchanged.
Hedging in this regulation was put in place to check, before recognition, the relevance of implemented hedges. In the hedging field, micro hedges are distinguished (targeted transactions) from macro hedges (mass transaction).
The aim is identical in both features of hedging Management: trying to secure cash flow to avoid a too great variation between the different results of a company and to avoid the vagaries of the market (liquidity crisis in 2009, crisis on raw materials in 2015).