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Trade Finance

Hedging

Risks that can be hedged by using derivatives:
changes in foreign exchange rates
EUR/USD, GBP/USD, USD/CHF, USD/RUB, etc.
changes in energy prices
Brent Crude Oil; Gasoil (ICE); Gasoline Euro-bob; European 1% Fuel Oil (CME Clearport), etc.
changes in agricultural product prices
corn, wheat, coffee,cocoa, soy, palm oil, etc./td>
changes in precious and industrial metal prices
gold, silver, platinum, copper, zinc, etc.
interest rate hike
3 month US Dollar interest rate


Hedging can be used by all market participants - exporters, importers, producers and suppliers. A producer can hedge a price rise of raw materials, a trade company - a price drop between an initial purchase and a subsequent sale. Import businesses interested in stable purchase prices can hedge against possible price hikes when entering into a new agreement, etc.

To minimize price risks when entering into an agreement an offsetting derivatives position must be opened.
If a commodity price falls, then a profit from a futures contract sale will compensate this loss and vice versa.

EXAMPLE: OIL BUSINESS HEDGING

DISCLAIMER: This overview (including any attachment (-s)) does not constitute a request, offer, recommendation or invitation of any kind to buy, sell or redeem any financial instruments or to conclude and/or to perform other transactions of any kind. The authors of the information presented in this overview, as well as JSC “Rietumu Banka", registered in the Commercial Register of Republic of Latvia, registration number 40003074497, legal address: 7 Vesetas Street, Riga, LV-1013, Latvia, hereinafter referred to as “Bank”, both together and individually, are not liable for possible use of the information presented in this overview, including any direct or indirect damages (including lost profits), as well as any penalties. Evaluations, opinions and forecasts presented in this overview are based solely on the Bank’s specialists' conclusions regarding financial instruments and issuers considered in this overview. While the information contained in this overview is obtained from sources believed to be reliable, the Bank does not guarantee its accuracy and completeness. Any of your investment decision should be fully based on your assessment of your personal financial circumstances and investment objectives. The Bank draws your attention to the fact that transactions in the securities and financial instruments market involve risk and require appropriate knowledge and experience.

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