CM

1. Name:- Bhumika H Sadija
Roll no :- FB350
Subject:- Commodities Marketing
Topic:- Hedging

2. Meaning of Hedge
 To hedge, in finance, is to take an offsetting position in an asset or investment that
reduces the price risk of an existing position.
 A hedge is therefore a trade that is made with the purpose of reducing the risk of
adverse price movements in another asset.
Example:-Using a hedge is somewhat analogous to taking out an insurance policy. If
you own a home in a flood-prone area, you will want to protect that asset from the
risk of flooding—to hedge it, in other words—by taking out flood insurance. In this
example, you cannot prevent a flood, but you can plan ahead of time to mitigate the
dangers in the event that a flood occurs.

3. Short Hedging
 A short hedge protects investors or traders against price declines in the future.
 It is a trading strategy that takes a short position in an asset where the investor or
trader is already long.
 Commodity producers can similarly use a short hedge to lock in a known selling
price today so that future price fluctuations will not matter for their operations.
 A short hedge is the opposite of a long hedge, which protects against rising prices.

4. Long Hedging
 A long hedge is one where a long position is taken on a futures contract.
 It is typically appropriate for a hedger to use when an asset is expected to be
bought in the future.
 The company seeking to buy the commodity takes the opposite position on the
contract known as the long-hedged position.

5. Advantages of Hedging
 Hedging limits the losses to a great extent.
 Hedging increases liquidity as it facilitates investors to invest in various asset
classes.
 Hedging requires lower margin outlay and thereby offers a flexible price
mechanism.

6. Disadvantages of Hedging
 Hedging involves a cost that tends to eat up the profit.
 Risk and reward are usually proportional to one other; thus, reducing risk will
lead to reduced profits.
 For most short term traders, e.g., for a day trader, Hedging is a complex strategy
to follow.
 If the market is doing well or moving sidewise, then Hedging offers little benefits.
 Trading of options or futures often requires higher account requirements like more
capital or balance.

7. Thank You