What Is Hedging

The best way to understand hedging is to think of it as a form of insurance. When people decide to hedge, they are insuring themselves against a negative event's impact to their finances. This doesn't prevent all negative events from happening, but something does happen and you're properly hedged, the impact of the event is reduced.

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Portfolio managers, individual investors, and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging is not as simple as paying an insurance company a fee every year for coverage.Hedging against investment risk means strategically using financial instruments or market strategies to offset the risk of any adverse price movements. Put another way, investors hedge one investment by making a trade in another.Technically, to hedge you would trade make offsetting trades in securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another.

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Hedging techniques generally involve the use of financial instruments known as derivatives , the two most common of which are FUTURES And OPTIONS . Keep in mind that with these instruments, you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.

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Most common Areas of Hedging.

• Commodities: It includes agricultural products, energy products, metals, etc. The risk associated with these is known as commodity risk.

• Securities: It includes investments in shares, equities, indices, etc. The risks associated with these are known as equity risk or securities risk.

• Currencies: It includes foreign currencies. There are various types of risks associated with it like - currency risk volatility risk, etc.

• Interest rate: It includes lending and borrowing rates. The risks associated with these are known as interest rate risks.

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Strategies of Hedging

• Diversification of asset allocation

• Using Derivative Instruments like Future and Options

• Using Forward Contracts 

• Spot to Future hedging in Commodity market.

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Why Hedging is Important

• It can be used for locking profit

• Enables traders to survive hard market periods

• It limits losses to a great extent

• As it facilitates investors to invest in various asset classes, therefore, increases liquidity

• It also helps in saving time as the long-term trader is not required to monitor/adjust his portfolio with daily market volatility

• It offers a flexible price mechanism as it requires lower margin outlay

• It gives the trader protection against commodity price changes, inflation, currency exchange rate changes, interest rate changes, etc. on successful hedging

• In hedging using option provides traders an opportunity to practice complex options trading strategies to maximize return

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Risks having impact in Price 

1) Security Risk

2) weather risk

3) Interest Rate risk

4) Demand and Supply risk.

5) Government policy/tax rate risk.

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Who gets benefited in Hedging

1) Importer

2) Exporter

3)Farmers

4) Manufacturers.

5) Investors

6) Students going for Foreign education

7) Tour operators

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What we Offer.

We provide customized services to our clients wrt to hedging and price risk management  strategies. As we all know the external environment is beyond our control and we cannot stay isolated in case of any uncertainties , therefore the risk management is a MUST of all the investors or actual users of  currency and commodity. For example an importer should hedge to protect himself  from the currency risk. If the rupeee depreciate then he will make losses is he do the actual payment in the future date.. Similarly for an exporter the vice versa is applicable. There are many more hedging strategies which we do for our clients. If you want to get more information please fill the form below our Executive will contact you.

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Click below for more information

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