what is the hedging?

Answer 1

What specific hedging do you have in mind?

Hedging a position.. represents taking a future contract position opposite to a position taken in a spot market. The purpose is to reduce risk exposure by protecting oneself from unexpected price changes. In contrast, a speculator takes positions in futures markets in the pursuit of profits and assumes price risk.

Hedging is not perfect in eliminating the risk of a position, market participants are concerned with fluctuations in the basis, which portrays the risk to the hedger.

Hedging a portfolio.. one would want to write Treasury bond futures contracts. As there is not a viable corporate bond futures market, one must resort to a cross hedge. As interest rates rise, the value of the futures contract will increase and vice versa.

Answer 2

In general, hedging is making one investment to offset the risk of another investment.

The other examples that have been given are partial hedges.

Risk management is important in the Financial Services industry. Let's look at an example of when an Investment Bank needs to hedge. Let's look at an example.

Suppose you are a bond trader, and a client sells you a $100 Million bond portfolio. You make your money by buying at a slightly lower price than the price that you sell at. But this is a large portfolio -- it might take you a week to sell all these bonds. In the mean time, if interest rates increase, all of the bonds in your inventory could lose money. You don't want to be exposed to this interest rate risk. You can enter into an interest rate futures contract where you gain money if rates go up and lose if rates go down. This is, essentially, a bet. You sell enough of these contracts to exactly offset the loss or gain of the bond inventory you hold.

Hedge funds use this idea to get rid of risks that they don't want to take, but leave some other risks unhedged, because they are willing to take certain risks.

Answer 3

Let's say you own an airline. Fuel is a big portion of your cost structure. Anticipating that the fuel will fructuate a lot, you buy some futures to hedge. If the fuel price does go up, you have to pay more but you also make some money from the futures. If the fuel price indeed goes down, you will lose some money from the futures but you can save from the fuel consumption.

Answer 4

When you successfully hedged something...You Gained NOTHING..You Lost NOTHING


Dictionary definitions of Hedging:

1 : to enclose or protect with or as if with a hedge
2 : to hem in or obstruct with or as if with a barrier
3 : to protect oneself from losing or failing by a counterbalancing action
4 : to evade the risk of commitment especially by leaving open a way of retreat
5 : to protect oneself financially: as
a : to buy or sell commodity futures as a protection against loss due to price fluctuation
b : to minimize the risk of a bet

Answer 5

You can hedge a stock by selling an in the money call or "covered call". Tons written about this.

Answer 6

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