The Economic Times  10 hrs ago  Comment 
Traders should play it safe this week. Stocks like Tata Steel, Tata Motors and Bharat Forge could be adversely impacted if the Brexit materialises, said Modi.
The Economic Times  Jun 17  Comment 
In the spot market, sterling recovered from 10-week lows against the dollar as both sides suspended their campaigns after a pro-European Union British lawmaker was killed on Thursday.
The Economic Times  Jun 15  Comment 
Over 8,000 farmers across the country participate on NCDEX platform to hedge their commodity price risk, it said in a statement .
Benzinga  Jun 14  Comment 
Can investors hedge their investments against a Donald Trump presidency? According to analysts at Citigroup and Barclays, such a trade is not only possible, but feasible. According to Bloomberg, the Donald Trump hedge bet consists of shorting...
Forbes  Jun 11  Comment 
It’s impossible to determine the success of an options trading strategy until liquidation. There are, however, for certain traders, strategies which will essentially enhance their bottom line under most circumstances. Hedging is a successful way...
The Economic Times  Jun 10  Comment 
One survey doing the rounds on Friday was a poll for the BT.com website that showed 80 percent of readers planning to vote to leave the EU.
The Hindu Business Line  Jun 6  Comment 
Facing difficulty in understanding the basics of the stock market? Do not fret. Hedge Equities, a financial services company based in Kochi, has worked out a solution for you. The company has laun...
The Economic Times  Jun 4  Comment 
The company said that objective of the game is to make people understand that stock market is not a pure game of chance as it depends on lots of other factors.
Forbes  Jun 2  Comment 
Delta's CEO is uncertain about hedging, locking in oil prices in the future while insight about Delta's refinery being profitable remains unclear to shareholders.


Hedging is any strategy designed to offset or reduce the risk of price fluctuations for an asset or investment. Hedging should not be confused with hedge funds, which are private investment funds that often, but not always, employ hedging strategies.

When an investor buys or sells a security, the investor bets that the price of the investment will move in a certain direction. As with any bet, there's always the risk of losing money if the price moves in the opposite direction. An investor hedges against this risk if he employs any tool or strategy that minimizes this risk.

In general, creating a hedge requires the purchase of a second asset with a negative correlation to the first. If the hedged security does not move as predicted, the hedge minimizes loss to the investor.

Common Hedging Techniques

Hedging using Futures

A basic example of a hedge is buying a futures contract for a commodity, such as oil. For a company that uses oil in its production process, an oil futures contract locks in a price until a given date, protecting the company from the risk that the price will rise even higher by that time. In this case, the company is said to be hedging against rising oil prices. The flip side of this is that if prices don't rise, but fall, the company will still have to buy the oil at the agreed-upon price.

Hedging is not about making a profit, but about removing uncertainty. Hedging merely aims at reducing unfavorable and unexpected risks.

Various other, more complicated futures hedging strategies exist, as well.

Hedging using Options

A married put is a simple example of a hedge that uses options. In a married put, the investor buys shares in a company and correspondingly buys a put option whose strike price is lower than current market price. Should the share prices go up, the put option is worthless and expires. However, should the share price go down, the put option is exercised and the investor has recovered some of his loss.

A complicated hedging technique using optiions is delta-neutral hedging. In this strategy, a portfolio of stocks is hedged in such a way that movements in the stock prices do not affect overall portfolio value. However, increases in volatility leads to an increase in portfolio value. One example of this is the CBOE Volatility Index, VIX.

Options are quickly becoming the hedging instrument of choice for investors all over the world, particularly in hedging stock portfolios. This popularity is due to the versatility of returns offered by option strategies, ranging from synthetic closings, complete downside protection, complete delta-neutral hedging and multi-directional profiting.

Is Hedging Profitable?

Hedging is profitable when used sparingly and effectively.

Hedging is used to reduce risk. But with reduced risk comes reduced returns. Hedging is usually expensive, and extensive hedging will not be cost-effective. Should an investor hedge extensively, he may find himself spending all of his investment profits and possibly more towards hedging.

Thus, most retail investors do not hedge, A few investors hedge if they know that their investment values depend on a certain event, such as an earnings report. Should the earnings report be negative, the hedge minimizes losses. Other than that, hedging and counter-risk measures are primarily used by corporations and institutional investors.

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