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Hedging in finance refers to protecting investments. We have covered the following in this article:
Hedging in finance refers to protecting investments. A hedge is an investment status, which aims at decreasing the possible losses suffered by an associated investment. Hedging is used by those investors investing in market-linked instruments. To hedge, you technically invest in two different instruments with adverse correlation. The best example of hedging is availing of car insurance to safeguard your car against damages arising due to an accident. The hedging techniques are not only employed by individuals but also by asset management companies (AMCs) to mitigate various risks and to avoid the potential negative impacts. Hedging does not prevent the investments from suffering losses, but it just reduces the extent of negative impact. Hedging is employed in the following areas:
Hedging strategies are broadly classified as follows:
The AMCs generally employ the following hedging strategies to mitigate losses:
Hedging provides a means for traders and investors to mitigate market risk and volatility. It minimises the risk of loss. Market risk and volatility are an integral part of the market, and the main motive of investors is to make profits. However, you are not in a position to control or manipulate markets in order to safeguard your investments. Hedging might not prevent losses, but it can considerably reduce the effect of negative impacts.