Hedging is a tool to reduce risk.
Companies hedge because currency and/or commodity values fluctuate. The hedge allows for a control valve on price changes. In the most simple sense:
A farmer is thinking about growing corn. He sees by the price of corn in the futures market that growing corn would generate a good profit, but what if the price changes between right now and when the corn is grown? He could "lose the farm." So he hedges. He calls his broker and sells corn on the futures market today (Sells Short.)
Three months later the corn has grown and he brings it to market, but the price has changed! Not to worry, he hedged. He receives $1 less per bushel due to the price change, BUT then he goes home and calls his broker and "Offsets" the hedge at the exchange resulting in a $1 per bushel profit. The exchange gain has offset the corn actual market loss, and the farmer has earned his expected profit. The hedge saved the farm.
This is the most common and simple hedge - A Sell Hedge.
Conversely, let's say you are an American Tequila Importer. In May you place an order for tequila, to be delivered in August. The manufacturer insists on being paid in Pesos. So in essence, in August you will need to take your dollars, and BUY (convert to) Pesos. But what if the price of the peso changes (Goes Up)? We could lose our potential profit! So we hedge. We go into the currency futures market and BUY August Pesos today. We are now long in the market, and "hedged". When August comes, if the actual pesos cost us more, we can offset the loss with our market profit. Inversely, if the pesos cost us less than we expected, we take that savings to pay off our market loss.
This is an example of a BUY Hedge.
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Naive hedging is where taking a hedge position without taking into consideration the level of hedging required. The optimal hedging position should be such that the expected position from the hedge perfectly offset the underlying risk. Naive hedging (over hedging) could potentially lead to a substantial gain or loss position from hedging.
Currency hedging is also known as foreign exchange hedging. It involves a method used by companies to eliminate risk resulting from foreign exchange transactions.
Hedging approach helps the company in financing decision making related to debt maturity.
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Analyze risk, Determine risk tolerance, Determine forex hedging etc.
The cast of Hedging - 1942 includes: Roy Hay as Himself - Commentator
The concept of hedging is to reduce the risk of financial loss. Hedging originated out of the 19th century commodity markets. A hedge can include stocks, exchange-traded funds, insurance, forward contracts, swaps, and options.
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Hedging tools are those tools which helps to mitigate the risk in the market. For e.g. Future Contract, Swap, Option etc.
Jeff L. McKinzie has written: 'Hedging financial instruments' -- subject(s): Hedging (Finance)
hedging is a way to get yourself protected against a big loss. You can even make an analogy of a hedge as having insurance for your trade. With forex hedging, you employ a method of decreasing the amount of loss that you are likely to experience if something bad comes up.
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The Diner - 2011 Hedging 1-4 was released on: USA: 24 November 2011
J. Dickie Hollier has written: 'Potential for hedging Louisiana rice' -- subject(s): Hedging (Finance), Rice trade
The verb to hedge can be used to mean avoiding a direct response, or it can mean counterbalancing against a possible loss (e.g. hedging one's bets). The second meaning is applied to investment strategy.Hedging is a process that is used to reduce risk of loss against negative outcomes within the stock market. Hedging is a similar concept to home insurance, where you might protect yourself against negative outcomes by purchasing fire and peril insurance. The only difference with hedging is that you are insuring against market risks and you are never fully compensated for your loss. This occurs when one investment is hedged through the purchase of another investment. Hedging is most useful under the following circumstances:- Those who have commodity investment that are subject to price movements can use hedging as a risk management technique- Hedging helps set a price level for purchase or sale of an asset prior to that transaction occurring- Hedging also makes it possible to experience gains from any upward price fluctuations to protect against downward price movements.
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Hedging involves in reducing risk in order to focus on another subject, while speculating involves taking on risk in order to profit from insight.
Gerald Douglas Gay has written: 'Hedging against commodity price inflation' -- subject(s): Hedging (Finance), Inflation (Finance)
Dallas - 2012 Hedging Your Bets 1-2 is rated/received certificates of: Netherlands:12