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Hedging: You have some stock you THINK might fall in price. Oh...you have some ConocoPhillips. You bought it at 20, it's now 40 and you're happy as a clam. But wait! You know Conoco's biggest chain of dealerships, the Flying J truck stop chain, is being purchased by Pilot, who owns a huge hunk of Marathon Oil. Translation: there is a distinct possibility Conoco's stock will go down because Pilot could start selling Marathon diesel at Flying J stores. To protect yourself against completely losing your ass over this deal, buy a one-year put in the $30-$35 price range depending on how risk-averse you are, and let things ride until the Pilot-Flying J merger is completed. (If you're seriously risk-averse you'd just get out of the position, but you'd hate yourself in the morning if the stock price went up after you did.)
Speculation: Let's deal in a nice cyclical stock--Brunswick. It's cyclical because of what they make--boats and Bowling center equipment. The stock goes down in the winter because people don't buy boats or replace bowling center equipment in the winter, and up in the summer because that's when people do both. If you'd like to speculate in Brunswick, make a prediction as to how low you think it's going to sink, sell puts for a little above that, and IF you were right you'll make out like a bandit.
What else can I help you with?
What is a forward contract?
A customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging.
Difference between speculation and hedging strategies?
Both can be explained with reference to signing a futures contract to deliver or buy a commodity at a future date. Hedging refers to locking in a future price for the commodity in order to minimize risk. It is a form of diversification, since typically the signer does not hedge with all of the product that he or she wants to buy or sell. Speculation, on the other hand, refers to agreeing to a futures contract in order to profit by taking risks. Since not all of the speculator's portfolio may not be at risk, this activity can involve diversification.
What is hedging tools?
Hedging tools are those tools which helps to mitigate the risk in the market. For e.g. Future Contract, Swap, Option etc.
Can you explain how forward contracts work in financial markets?
Forward contracts are agreements between two parties to buy or sell an asset at a future date for a predetermined price. These contracts are customized and traded over-the-counter, meaning they are not standardized like futures contracts. Investors use forward contracts to hedge against price fluctuations or speculate on future price movements.
What is hedging in financial management terms?
If a business is exposed to a risk of any kind (interest rates, currency fluctuation, commodity prices, etc.) they can partially offset that risk by hedging. In hedging they would enter into a contract whose value will fluctuate in the opposite direction of their business risk position. If they build things from wood, they may want to buy wood future contracts. If the price of wood goes up their business costs rise but that should be partly offset by a profit on their futures contract.
What is differences between currency future and currency future contracts?
"Futures" and "Futures contracts" are the same thing.
Can you explain how future contracts work in the financial market?
Futures contracts are agreements to buy or sell assets at a set price on a future date. They allow investors to speculate on price movements and hedge against risk. Traders can profit from price changes without owning the underlying asset.
Are Dow Jones Futures future contracts?
Yes. Dow Jones Futures are future contracts. This is because future contracts practically do not have an expiration date. It is also good because of the fact you can buy and sell single or bulk stock futures.
What does market speculation mean?
A Stock market speculation means - Predicting the price of a market entity (A Stock for example) in future. If the speculation is positive, we buy. If our speculation is negative, we don't bye or sellbuy low sell high
What are forward contracts in shares?
A forward contract is the simplest of the Derivative products. It is a mutual agreement between two parties, in which the buyer agrees to buy a quantity of an asset at a specific price from the seller at a future date. The Price of the contract does not change before delivery. These type of contracts are binding, which means both the buyer and seller must stay committed to the contract. This means they are bound to deliver or take delivery of the product on which the forward contract was agreed upon. Forwards contracts are very useful in hedging
What kind of assets are traded using futures contracts?
Futures contracts are commonly used to trade a variety of assets, including commodities such as oil, gold, and agricultural products, as well as financial instruments like stock indices, interest rates, and currencies. These contracts obligate the buyer to purchase, and the seller to sell, the underlying asset at a predetermined price on a specified future date. Futures are primarily utilized for hedging risk or speculating on price movements. Additionally, they are standardized and traded on regulated exchanges.
What is capital in financial terms?
If a business is exposed to a risk of any kind (interest rates, currency fluctuation, commodity prices, etc.) they can partially offset that risk by hedging. In hedging they would enter into a contract whose value will fluctuate in the opposite direction of their business risk position. If they build things from wood, they may want to buy wood future contracts. If the price of wood goes up their business costs rise but that should be partly offset by a profit on their futures contract.
