Hedging Techniques

Hedging Techniques

Basically hedging mean the reducing or eliminating the risk factor.

Types of Hedging Techniques

Basically there are two types of hedging techniques

1. Internal Hedging Technique
2. External Hedging Technique

1.Internal Hedging Techniques

with the help of internal hedging techniques risk is reduced however total risk elimination is not possible whereas with help of external hedging techniques risk elimination is possible.



The following are the internal hedging Techniques

1. Invoicing in local currency
2. Advance payment from customer (Leading)
3. Netting also know as netting

2. External Hedging Techniques

The following are important external hedging techniques

1. Forward Contract
2. Money Market involvement
3. Currency Contract
4.  Future Contract
5. Currency options

Market Risks

 Market Risks

There are basically two type of Market Risks

1. Systematic Risk
2. Unsystematic Risk

Exchange Rate Risks

 Exchange Rate Risks

There are basically three types of Exchange Rate Risks

1. Transaction Risks
2. Economic Risks
3. Translation foreign currency risk

1.Transaction Risk 

 There are mainly two types of risk which can be classified as transaction risk. one type of risk that you trading and receiving payment in future so the amount of receivable is not certain and other type is short term loan with repayment schedule in future again the amount receivable can not be predicted . The Hedging techniques are used to reduce the risk.

2.Economic Risk 

This risk relates to the long term investment made in another country and the future remittances are not certain. This is basically long term arrangement and therefor it is difficult to minimize the risk by hedging Technique.

3.Translation Risk 

This risk is referred to reporting of foreign transaction in the financial statement.