– Do you have risks in your business❓Hedging
– What sort of risk❓
– Do you know how to mitigate, live or handle risks❓
– If yes, how do you❓
Hedging is one of the main solutions
What is hedging❓
Hedging Is a method of reducing exposures to adverse fluctuations in prices, interest rates or foreign exchange rates or it is the process of using offsetting commitments to minimize or avoid the impact of adverse price movements.
• Hedging transactions are often used to protect positions in:
1⃣ Commodity buying
2⃣ Foreign currency
• Companies hedge an investment by taking an offsetting position in a second investment instrument.
• Common forms of hedges include futures contracts, put or call options that transfer the risk of the fluctuating prices to other parties.
• The objective of a hedging arrangement or transaction is to reduce or eliminate a company’s risk.
Short Hedge and Long Hedge Financial Hedging
• Short hedges: are future contracts that are sold to protect against price declines.
• Long hedges: are future contracts that are purchased to protect against price increases.
• Insurance is neither long nor short hedge, it is natural hedge, it is unlike other tools that it does not require the use of sophisticated financial tools. However, natural hedges are not perfect in that they do not eliminate all risk, it’s a way of minimizing the financial risks by investing in more than two different items which tends to cancel each other. Pair trading is a type of natural hedge. Pair trading involves buying long and short positions in highly correlated stocks. Investing in both stocks and bonds is sometimes viewed as a natural hedge, since the performance of one offsets the other. Financial Hedging – adverse fluctuations in prices and interest rates