Derivatives, as their name suggests, are a financial instrument that derive part of their value from an underlying asset, reference rate or index. The underlying asset can be physical (coffee, gold, etc.) or financial (stocks, interest rates, etc.), traded in the spot market or not (it is possible to build a derivative on top of another derivative). In addition, derivatives can be classified into forward contracts, futures contracts, call and put options, swap operations, among others, each with its own characteristics.
The exchange operation, in turn, is the exchange of the currency of one country for the currency of another country. This operation does not only refer to the act of exchanging currencies, but also the necessary amount of local money to buy money from other countries, the so-called exchange rate. Which can be used to generate a derivative in order to transfer the exchange risk.
In this sense, the hedge operation seeks to eliminate price variation risks through derivatives. In this case, derivatives are used to take a position contrary to the position assumed in the spot market, transferring the risk arising from adverse fluctuations in prices. In this way, protection of asset prices against market volatility is created.
