At the Eurometal Steel Day & YISAD Flat Steel Conference held at Istanbul Marriott Hotel Asia on Tuesday, April 8, in cooperation with SteelOrbis, Fabrizio Casaretto, company owner at Risk Yönet Consultancy, explained to the audience what hedging is and how it works. Mr. Casaretto said that hedging includes methods to control some risks that can harm individuals and institutions and can be considered as a kind of financial insurance. Hedging aims to keep a certain value at a certain level or create additional yield. Market risks that might need hedging include prices, exchange rates and interest rates, while derivatives might be used against these risks, he noted. These derivatives include swap/forward, futures and options.
Mr. Casaretto indicated that the derivatives in question are either found on stock exchanges or over the counter, adding that, if the asset that needs to be hedged does not have any derivatives on the stock exchange, then OTC might be used. “Among hedging instruments, futures and options might be preferred because they are traded on the stock exchange and the stock exchange plays the role of the guarantor and the conditions are clearly set, while, for OTC, contract conditions are set by the parties and there is a risk that one of the parties can back down. There are no guarantors,” he explained.
Pointing out that derivates are high-risk only if there is speculative action, when used for hedging purposes they are instruments to minimize risks, Casaretto underlined that hedging mechanisms change depending on the business and each stage. “Hedging is a win-win product. If not used, it will benefit the institutions that want to monetize on your open risks. Hedging raises the value of an institution,” he concluded.