SHORT HEDGING

A short hedge is used by those who expect a decline in the price of some asset. This may be the case of a producer who has not lifted its grain harvest, or an exporter to receive a payment of sales in foreign currency. For example:

A national company that developes software for a U.S. company. The delivery and payment thereof shall be held in May. The Company is exposed to the risk that the dollars received lose purchasing power. For this reason, the CFO of the company decides to make a hedge in the futures market, selling futures contracts in May to $3,088/U$S.

There are two possible scenarios when receiving foreign currency as a payment:

1. The dollar dropped to, for example, $3,065/U$S. In this case the loss in value from the spot market is offset by the gain in the futures market. To cancel its position the company should buy futures at the prevailing price, ie $ 3,065/U$S, giving out $ 0,023/U$S in its favor.

2. If the dollar had increased, the resulting loss in the futures market would have been offset by the higher value obtained by changing the dollars in the physical marketplace. Even though in this case the result would have been higher without the contract, the exporter chose to hedge the currency risk. The ex post analysis has no value here. The hedge decision is taken together with the spot operation, eliminating the possibility of further losses or gains to the set.