Hedging – What Is It, And It's Uses In Risk Management

Author:Dwayne Strocen
Second of a two part article

Before discussing the use of hedging to off-set risk, we need to understand the role and the purpose of hedging. The history of modern futures trading began in Chicago in the early 1800's. Chicago is located at the base of the Great Lakes, close to the farmlands and cattle country of the U.S. Midwest making it a natural center for transportation, distribution and trading of agricultural produce. Gluts and shortages of these products caused chaotic fluctuations in price. This led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in contracts to insulate them from the risk of adverse price change and enable them to hedge.

The first commodity exchange was the creation of the Chicago Board of Trade, CBOT in 1848. Since then, modern derivative products have grown to include more than the agricultural industry. Products also include Stock Indices, Interest Rates, Currency, Precious Metals, Oil and Gas, Steel and a host of others. The origins of the commodity and futures exchange was created to support hedging. The role of speculators is beneficial as they add trading volume and important volatility to what would otherwise be a small and illiquid market place.

A bona-fide hedger is someone with an actual product to buy or sell. The hedger establishes an off-setting position on the futures or commodity exchange, thereby instituting a set price for his product. Someone buying a hedge is known as being "Long" or "Taking Delivery". Someone selling a hedge is known as being "Short" or "Making Delivery". These positions known as "Contracts" are legally binding and enforced by the exchange.

Entering your trades either for speculation or hedging is done through your broker or Commodity Trading Advisor. Commodity and Futures exchanges are distinct from Stock Exchanges, although they operate using the same principals. They are regulated by different agencies such as the Commodity Futures Trading Commission who are responsible for regulation of retail brokers in the USA as well as Commodity Trading Advisors who are portfolio Manaqers.

Now let's view some real life examples of hedging or mitigation of risk by using exchange traded derivatives.

Example 1: A mutual fund manager has a portfolio valued at $10 million closely resembling the S&P 500 index. The Portfolio Manager believes the economy is worsening with deteriorating corporate returns. The next two to three weeks are reports of quarterly corporate earnings. Until the report exposes which companies have poor earnings, he is concerned of the results from a short term general market correction. Without the privilege of foresight, he is unsure of the magnitude the earnings figures will produce. He now has an exposure to Market Risk.

The manager thinks of his options. The greatest risk is to do nothing, if the market falls as expected, he risks giving up all recent gains. If he sells his portfolio early, he also risks being wrong and missing further rally's. Selling also incurs substantial brokerage fees with additional fees to buy back again later.

Then he realizes a hedge is the best option to mitigate his short term risk. He begins by calling his CTA (Commodity Trading Advisor) and after consultation places an order to sell short the equivalent of $10 million of the S&P 500 index on the Chicago Mercantile Exchange "CME". Now his result is when the market falls as expected, he will off-set any losses in the portfolio with gains from the Index hedge. Should the earnings report be better than expected, and his portfolio continues upward, he will continue making profits.

Two weeks later the fund manager again calls his CTA and closes the hedge by buying back the equivalent number of contracts on the CME. Regardless of the resulting market events, the mutual fund manager was protected during the period of short term volatility. There was no risk to the portfolio.

Example 2: An electronics firm ABC has recently signed an order to deliver $5 million in electronic components of next years model to an overseas retailer located in Europe. These components will be built in 6 months for delivery two months after that. ABC instantly realizes they are exposed to two risks. 1. the rising and volatile price of copper in 6 months may result in losses to the firm. 2. the fluctuation in the currency could easily add to those losses. ABC being a young firm cannot absorb these losses in view of the highly competitive market from others in the field. Losses from this order would result in lay-offs and possibly plant closures.

ABC telephones their CTA and after consultation places an order for two hedges, both for an expiry in 8 months, the date of delivery. Hedge #1 is to buy long $5 million of copper effectively locking in today's price against further price increases. ABC has now eliminated all price risk. The risk of plant closures is greater than the lure of increased profit should copper price fall. After all, ABC is not in the business of speculating on copper prices.

Hedge #2 is to sell short the equivalent of Euro Currency vs US Dollars. Since ABC is effectively accepting EC in payment, a rising US dollar and a weak EC would be detrimental and erode profits further. The result of the hedge is no risk and no surprises to ABC in either copper or currency levels. A risk free transaction and full transparency is the result. In 8 months with the order completed and the customer accepting delivery, ABC notifies the CTA to close the hedge by selling the copper and buying back the Euro Currency contacts.

Many examples exist to demonstrate the mitigation of risk to an institution or financial portfolio. New products are constantly created and available on both over-the counter and exchange traded markets. It would be wise to consult with a qualified Commodity Trading Advisor or broker to discuss the analysis for an on-going risk management solution or a one time only hedge.

Firm real estate investment tips

Author: Sharon Samraj
With the direct impact investors sought an immediate alternative for the asset classes other than the stock markets, so that they could decide where to invest their hard earned money. This criterion has brought about a global boom in the real estate markets and the property prices. Thus it has also brought about a rise in the real estate investors. For people who are thinking upon the fact that: are they too late to venture in the real estate markets, then this article will help you to know some of the key-points that you should not forgo when you are making your real estate investments.

Ensure you have profitable plans at hand: Now you might say that this is a quite easy task, but there are hundreds of people who analyze on this fact that are their plans are very much viable and profitable. When you examine any real estate market you will find people comparing the property values of different areas throughout the city. They make sure what the worth of their properties they buy is. The next thing that you need to be sure about is that: are you asking for a realistic rental rate or are you asking the rental rate that is for the property that is renovated once.

Assumptions are restricted: The moves in the real estate investments need to be sure and they are not driven by assumptions, I accept the fact that experience speaks a lot but try and make least assumptions in your deals. With regard to the tax laws everyone tends to assume that they won’t change but the way the tenants explain the situation that they are proud of the house and they think it is fair enough to take the first quotation. Hence it is important that you need to diligently discharge all your duties right from quoting a fair price for the property till checking thoroughly the returns that the accountant files for you. We all are aware that we need to stand upright for all your responsibilities and duties.

Consult an expert when you are in doubt: There are few people who consider themselves to be the master of all trades but human nature needs to acknowledge that they need to resort to a second opinion when in doubt. The analysis of real estate investments needs to be thought about right from the start of checking the structural soundness of the property till the legal laws for letting out your property. When you are in a doubtful situation or a waverly situation ensure that either you double check or consult an expert, you can take you out from mere assumptions.

Realistic value: For any real estate investor, it is important to understand that you set a realistic price for every property whether you are purchasing the property to rent it or thinking to renovate the property and then let it out. So ensure that you add the expenses along with the budget. Real estate investments require suitable involvement of time in detailing, what are the areas where the cost has to be invested and then you can arrive at a resistant proof budget with no last minute uninvited surprises.

Why to invest in property in France?

Author:Derek Grimshaw
France provides a stable political climate, a beneficial market to invest, round the year tourist locations and huge returns on investment in both resale and rental properties. Moreover UK and France share the double tax treaty which allows the person to pay tax only once on his earnings. Some of the favorable reasons for buying property in France are

• The Property prices in France are relatively low when compared to most European Countries.

• France has a big requirement for good rental apartments/houses on a long term basis. The percentage of people who rent property as opposed to those who purchase property is much higher in France than in UK. Thus the long term residential property price growth in France is approximately 10 percent per annum with a respectable net rental yield summing up to 8-10% of the investment.

• France rely more on its residents on investment in property (95%) who constantly purchase holiday or permanent accommodation. Thus France has a rigorous buying going on, a protective legal system and a wonderful resale market.

• France is providing 100% finance for foreigners with mortgage rates about 4% and low Euro interest rates. Government backed “leaseback” Investment property with guaranteed yields up to 5.5% and full VAT refund of 19.6%. French Law allows all costs including mortgages to be settled against rental income which reduces the amount of actual tax paying.

• The Capital gains tax on housing rentals has been halved to 16% and can be exempted if the bearer holds the property for more than 15 yrs.

• It is the most visited tourist location in World with constantly emerging tourist market demanding fresh supply of new tourist accommodations.

• Property investment in France is provides opportunity to enjoy the cosmopolitan atmosphere, culture, lifestyle, french food and wine etc. in holidays and earning rent from the property rest of the time.

Thus France is a land for investment in Property these days especially for the UK citizens.

Student Accomodation market holding up well

Author:Tugsearch
High demand, low supply growth, rising rents and high occupancy rates make student accommodation one of the less risky buy to let investments at present, Savills Research say.

But some potential property investors may find there is a limited availability of appropriate investment vehicles which risks frustrating attempts by individual investors to benefit from the sector.

'An underlying supply/demand imbalance points to a robust outlook for the sector, while the fundamental strengths of the business model mean that capital values have not fallen to the same degree as other commercial or residential real estate,' said Jacqui Daly, director of Savills Research.

Nationally, average rents for Purpose-Built Student Housing (PBSH) grew by 5% between 2007/8 and 2008/9, and 7% in London, the research shows. While private rented sector rents offer higher rental growth (+8% nationally and +10% in London), this is without the certainty of high occupancy rates.

Demand for PBSH shows no signs of falling and this will underpin future growth. Undergraduate student applications are up 9% for 2008/9, with growth in student numbers outpacing the new supply of accommodation by a factor of 10 nationally and 15 in London.

However the current financial climate, in particular the withdrawal of developer debt-funding, will limit the scope for investors to grow their interests. As a result, the past 12 months have seen consolidation of stock, with operator activity focused primarily on buying and selling existing stock from universities and private operators, as well as refurbishing old university stock, rather than organic growth through new developments.

As a result, and in the face of rising student rolls, demand will continue to rise particularly in London where planning constraints are severely limiting the ability of operators to grow their portfolios and increase the level of new supply in the market.

'The scope for individual investors to access this market is rather limited against a backdrop of constrained credit availability, particularly as lenders have tended very recently to tarnish student accommodation with the same brush as buy to let investments which have proven very much higher risk in the market downturn.

There are, however, investment vehicles, for example retail funds, which allow individual investors to invest indirectly in the sector,' explained Marcus Roberts, head of student housing at Savills.

Benefits of utilizing awnings

Author: Sarah Jose
Awnings enhance the beauty and decoration of your building - Awnings can provide a stylish look to your building. They are available in different shapes, sizes, designs, colors, patterns, materials and styles. Awnings can be used to enhance the exterior charm of your building.

Awnings provide UV protection to your building - Awnings protect your building interior from harmful UV rays of the sun. Awnings can reduce the interior heat in your home and business place. It prevents your furniture, carpet, drapes, floor, etc from fading due to UV rays. It also prevents the health risks associated with too much UV ray exposure.

Awnings provide weather protection to your building - Awnings offer protection from wind and rain. Sensor-controlled awning will automatically retract the awning when it senses the occurrence of wind and rain. This will be highly beneficial when you are not at home.

Awnings provide energy saving benefit - One of the greatest benefits of using awnings is energy savings. Awnings can reduce your air-conditioning cost as the awning fabric does not trap heat and moisture. Several studies disclose that awnings provide energy savings by dropping the direct solar gain through windows. The amount of cooling energy saved by using awnings depends upon the number of windows, window orientation, window glass type, and the climate surrounding the building. A recent report about awnings says that "Awnings are an effective way to reduce heat gain and prevent cooling energy loss in households. This benefits the environment by reducing greenhouse gas emissions and the homeowner by saving them money on energy bills."

Awnings enable you to enjoy outdoor activities - Awnings enable you to expand your living outdoor space for an affordable cost. By using awnings, you can enjoy the outdoor activities with added safety and comfort without experiencing excessive heat and sun exposure. Awnings are perfect for relaxing with the family or for entertaining your guests.

Awnings are durable investment for your building - Awnings are made using UV resistant and weather-proof materials. They have an average life span of about 5-25 years. Hence they are highly durable investment for your building.

Awnings are easy for maintenance - Awnings require minimal washing and sweeping. Hence they can be easily taken care and cleaned by the homeowner. You can easily remove mildew and stains from your awning using mild soap and a soft brush. Awnings can also be professionally cleaned.

Awnings are excellent medium to advertise your business - Awnings can be used to communicate your business message. Awnings are great way for advertising to promote your business or product. Awnings can be custom-designed and made with attractive colors, graphics, fonts and patterns. They can be used as outdoor advertisement and signage display, signboard, signage or billboard. Now-a-days, people install awnings for advertising purpose than for weather protection purpose.

Awnings can be used to provide lighting - Awnings can be used for internal illumination. The number of lights to be fixed to the awnings used for internal illumination depends on the height of the awning. Retail and fast food stores usually use backlit awning. Restaurants and coffee shops usually use down lit awnings. High-end restaurants and retailers use front lit awnings. A backlit awning offers night-time exposure and security lighting for your business place.

Awnings are very much user-friendly - Awnings are available as manual or automatic awning, remote or sensor-activated awning.
can easily remove mildew and stains from your awning using mild soap and a soft brush. Awnings can also be professionally cleaned.

Awnings are excellent medium to advertise your business - Awnings can be used to communicate your business message. Awnings are great way for advertising to promote your business or product. Awnings can be custom-designed and made with attractive colors, graphics, fonts and patterns. They can be used as outdoor advertisement and signage display, signboard, signage or billboard. Now-a-days, people install awnings for advertising purpose than for weather protection purpose.

Awnings can be used to provide lighting - Awnings can be used for internal illumination. The number of lights to be fixed to the awnings used for internal illumination depends on the height of the awning. Retail and fast food stores usually use backlit awning. Restaurants and coffee shops usually use down lit awnings. High-end restaurants and retailers use front lit awnings. A backlit awning offers night-time exposure and security lighting for your business place.

Awnings are very much user-friendly - Awnings are available as manual or automatic awning, remote or sensor-activated awning.

Commercial Real Investment Strategy: Specialize

Author: Craig Higdon
Folks, this weeks comments may be a bit too revealing for some of you. Im going to talk my inner self & and I DO mean INNER. But before I go there, I should mention that if you use Twitter, there a really NEAT freebie that you can use to explode your social network.

Its called TweeterGetter. It is totally free. Just click on the link, fill in your Twitter username and password, and click on the button (you can get a Twitter account there, too & also free). Now, back to my inner self I had to undergo a medical procedure today that men knocking on the door of their 50s get to experience usually for the first time.

Now if you are at all squeamish & DO NOT READ the paragraph beyond this point beyond the next sentence! We are still lending and getting a bit more aggressive in rescuing stalled construction loans, so be sure to ask us about the C.P.R. Financing Program. Now, If youre squeamish, please skip to the Financing Tip, OK?

Youve been warned. One word for you: Colonoscopy. Yeah, its true, the proctologist WILL get you in the end. However, I am here to report that the preparation is the worst part of the process. You are blissfully knocked out for the actual uh, procedure. Ok, Ive revealed more about my inner-self than any man should. On to the commercial real estate world.

Commercial Investing Tip

Do You Have A Specialty? When you go to see your doctor about a specific problem that is not in his area of expertise, he usually refers you to a specialist.

First, Specialists know their field of expertise far more intimately, thus are able to evaluate candidate projects more effectively.

Second, Specialists know who the best vendors are for things like brokers, repairs, management, lenders, etc. and have an easier time finding qualified help.

Third, Specialists know how to manage their assets better and can adjust to changes in the market place more quickly.

Fourth, Specialists have an easier time raising capital or getting financing because of their track record in the property type. Money likes to work with seasoned professionals.

So to maximize your income opportunities, consider focusing on a particular property or transaction type.

Fund management of the future

Author: Tugsearch
From New York to London to Hong Kong to Tokyo, the newly formed global network cracked under the strains of the economic quake as the ground shook. Some of the institutional pillars of the financial world shook. Iceland fell; Lehman Brothers and Bear Stern crumbled; Merrill Lynch saved itself by securing an all-stock buyout with Bank of America; Goldman Sachs found comfort in Birkshire Hatherway. The financial landscape remodeled itself nearly everyday as Hedge Fund executives observed through pink pages.

The quake also exposed some significant cracks within the financial foundations. Bernie Madoff showed the world how an unregulated sector of the financial ecosystem could be fuelled purely on self-confidence and yet still report colossal gains. The global networks that supported the highs of the FTSE 100 and Dow Jones showed vulnerability as a domino effect fell across the globe. As the seismologists arrived and the Governmental aid and private investment doused out the flames the land looked bleak. The public confidence in institutional governance and reporting became sulfuric and the frustrations into the prohibitive workings of such operations as hedge funds solidified into forms of regulatory reviews.

And now that the land is still and the dust has settled people, companies, markets and economies are looking for learning’s from the past to strengthen their future prospects. And like all scorched land, grass roots are beginning to appear as a newly fertilized financial ground bears opportunity. Within the hedge fund market acquisitions are strengthening the larger firms while newly considered regulation is potentially increasing the accountability and transparency of their every day business. This bodes well for public confidence in fund and asset management.

The regulation of hedge funds, rather like the funds themselves, is a complex matter. Because of their different properties and practices, hedge funds as a group are best understood from a legal, not economic, perspective, as hedge funds typically are exempt from the registration and disclosure requirements of the financial industry. This results in no official hedge funds statistics with little outside knowledge about their financial movements. This is not helped by hedge funds being based in offshore jurisdictions, making them look even more suspicious.

One solution to this scepticism is to introduce better regulation. This would produce more accountable hedge fund managers in future and the investors would be able to simply research the background of a hedge fund manager before entrusting their money into his or her hands. The result is beneficial for both investor and hedge fund as regulation would produce a safer hedge fund market that would attract a larger number of investors.

So, though the once scorched landscape may currently look barren, with it brings re-fertilized opportunity and prosperity where public confidence and fund management accountability will fuel green shoots and provide sustainable and stable growth throughout the sector.