In Mexico, derivative financial instruments, currently demonized, given the serious financial problems in which certain businesses got into due to their high exposure to risk (Gruma, Autlán, Grupo Posadas, Grupo Industrial Saltillo, Vitro, Alfa, Cemex and particularly Controladora Comercial Mexicana). Financial instruments are those whose value depends on or derives from the value of a good, financial or non-financial, existing in the market, such as the dollar or another currency, interest rates or the price of a good, the latter of which are called “commodities. ”(Gold, silver, oil, natural gas, cotton, grains, cattle, etc.).
Derivatives are very useful for business, but knowing how to make a reasonable use of them, some examples of them are hedging, futures and options; In this presentation I will treat the first two in a simple way.
Coverage
If a Company has significant payment commitments in dollars, on occasions of financial volatility, such as those that we experience periodically in our country, let's remember 2008, with an average exchange rate of $ 10.50 x US $ 1 from January to September, then in the following months it went to $ 12.86 in October, $ 13.42 in November, $ 13.82 in December and so on until exceeding $ 15 in March 2009. What happens with some companies? Depending on the particular circumstances, you may have liquidity problems or even continuity problems as a going concern; in those moments of uncertainty, the Company wants to “buy a security”, to have a ceiling with respect to the exchange rate; that is where coverage comes in handy, in this case dollar coverage. Its operation is as follows,Suppose the hedge was contracted in December 2008, the exchange rate is $ 13.82 and it is rumored that it will go up to more than $ 15 x 1, and you contract a hedge for $ 13.82 x 1, the operation would be as follows:
Was the coverage good or not? Of course it was, since there was security at a time of uncertainty, how good or how bad, since that will have to be quantified when the coverage period ends, comparing the payments made in pesos vs. covered payments, so you can have a profit or a loss, but in any case, the main benefit was having a fixed exchange rate.
The previous example was the case of a hedge in dollars, but there are also in other currencies, in interest rates, commodity prices, among others.
Futures
The businesses that participate in the production and / or commercialization of commodities, for example, a company that produces or sells grains, what will it produce or commercialize?, Given that today's prices will not be the same tomorrow, much less within a couple of months, for them there are futures, which by contract a future price of a good is agreed, in this case the producer has a "guaranteed price" and on that basis, produce what is most convenient.
To exemplify the above, suppose that you are a barley producer and the current price is $ 3,300 pesos per ton, and you have doubts about what to grow for the next agricultural cycle, the company contracts a "future", in which a price is agreed from $ 3,700; and given the circumstances, it is considered a good deal, since it is a higher price than the market at that time. Later, at the time of harvest, there is a shortage of barley worldwide and the price of a ton of barley is quoted at $ 4,500; Since the future forces the products to sell at $ 3,700 per ton, it would have a "loss" of $ 800 per ton, based on the market value at that time.
The opposite case can also occur, we assume the same future contracted of $ 3,700 of a ton of barley, after the time of harvest and sale, there is a global overproduction of barley and the market price is at $ 2,800; in this case, the producer will be paid for the ton of barley at $ 3,700 that was the future contracted, for which he will obtain a "profit" of $ 900 per ton. Obviously, there are other aspects to be evaluated such as the quantity of tons considered in the contract, since the surplus is not covered by it.
In a similar way to hedging, the usefulness of this instrument is to have a security, since we do not know future events.
Conclusions
1. Derivatives are very useful and necessary financial instruments.
2. The financial needs of entities have been changing, so that derivative financial instruments have evolved, some of them becoming complex.
