Hardening
What Is Hardening?
Hardening is a reference to trading conditions where securities prices are rising and volatility is declining in a specific financial market. Albeit the assessment that a market is hardening can be applied in several specific circumstances, it is most commonly utilized while alluding to the market for commodities futures.
The term hardening can likewise be utilized in the insurance and banking industries to allude to a period of more rigid underwriting or lending standards.
How Hardening Works
In commodities trading, a market is supposed to be "hardening" in the event that its prices are consistently rising when volatility is moderately low. For some traders, a market that is hardening presents ideal conditions for trading due to the apparently quiet and unsurprising nature of the market at such times.
Of course, for traders wishing to conjecture on large developments in commodity prices, a hardening market may be a negative sign, as the subsequent decline in volatility could take those large actions less inclined to emerge. This could be especially harming for owners of options contracts set against those commodities, whose value generally falls when the volatility of their underlying asset diminishes.
While hardening is most frequently noted in reference to the trading conditions of commodities futures markets, it is likewise used to allude to periods of severe underwriting or lending standards in the insurance and banking industries.
What Speculators Mean for Volatility
A commonly held conviction is that the rise of speculators into the commodities futures markets has prompted an increase in price volatility on futures contracts. Going against the norm, a few specialists have presumed that a convergence of futures traders, and the liquidity that they bring to the market, meaningfully affect futures prices.
These specialists recommend that futures markets are viewed as unstable not in light of price variances, but rather due to a great deal of leverage accessible to futures traders. Via model, equity margin requirements are generally around half, while margins as low as 5% to 10% are common for futures contracts. Under these conditions, even small variances in price can immensely affect the owner of a profoundly leveraged futures position.
Special Considerations
At the point when applied in the insurance and banking industries, the term hardening has an alternate importance. In these industries, hardening is commonly used to allude to periods of more thorough underwriting or lending standards. These periods frequently arise following a financial shock, for example, the credit crunch that happened during the 2007-2008 financial crisis.
More thorough underwriting or lending rehearses are sometimes executed in response to dangerous choices by the financial institutions included, for example, the hopeful derivative contracts and subprime loan agreements that American banks and insurance companies went into prior to the 2007-2008 financial crisis. In the aftermath of this financial crisis, financial firms were quicker to reset their lending and underwriting standards on a more conservative balance.
Albeit this reversal in sentiment among financial institutions-from dangerous to more conservative-can assist with lessening the incidence of unseemly insurance contracts and too hazardous loans, it can likewise make it hard for creditworthy counterparties to secure credit or insurance. In these periods of fiscal "hardening," consumers and market participants the same will frequently grumble that endorsement criteria have become pointlessly onerous.
Features
- In the banking and insurance industries, hardening is in many cases seen in the aftermath of financial crises when financial institutions are more anxious to control and reduce their risks.
- The term hardening is additionally common in the insurance and lending industries, where it alludes to periods of time when more thorough underwriting or it are executed to loan rehearses.
- In the finance industry, the term "hardening" is commonly used to allude to a period of rising prices and reduced volatility, explicitly in the commodities trading industry.
