Hedging

Hedging techniques are used to manage financial risks of an organization. There are mainly two types of financial risks that are faced by an organization.

• Foreign Exchange Risk
• Interest Rate

The idea is simple. Simply, Hedging is reducing the risk of an investment by creating another investment. Now lets see what types of hedging techniques are available for an organization. Mainly, there are two types.

• Internal
• External

Internal Hedging techniques are those techniques that are created inside the organization. Examples are, invoice in home currency, matching and netting. External hedging techniques are those techniques available outside the organization. Examples are Forward rate contracts, money market hedge, Options, Futures, Swaps and Swaptions.

Lets look at these techniques one by one later.