What is Hedging?
Hedging is an action aimed at reducing or completely eliminating the risk, resulting from the transaction. With its help, the investor limits the risk taken, so that if a bad decision is made, he does not lose or minimizes the losses incurred. Protection is provided for prices in the market, which can change dynamically.
What is hedging based on?
Depending on the type of financial instruments, this can be a differently chosen strategy. In the case of currency hedging, two completely opposite positions are taken, in the futures market and in the spot market. In the case of stocks, it will be price hedging by selling or buying other derivatives. In other words, the investor must take an “opposite” position using, most often, a derivative whose price behaves in an opposite manner to the hedged instrument. Its practical application with the result is very well presented in the book “The Alchemy of Finance” by G. Soros.
Does hedging always protect the investor?
Unfortunately not, because hedging, or hedging, is merely minimizing risk. Therefore, depending on the decision taken, there is always a risk that you can still lose on the transaction. So one must always take this into account and be prepared.
Is it possible to make money on hedging?
The main idea of this strategy is not and never has been to make money. Therefore, investors who would like to use such a solution must expect that they will not have profits from hedging operations.
Why is hedging used?
Changes in financial markets are happening very dynamically. Prices of currencies, commodities, stocks, etc. change all the time, and investors are not always ready for changes. Therefore, investors who are aware of the risks they are taking are just trying to use such a hedge against price changes.
Can hedging be learned?
Nowadays one can have access to a very extensive body of knowledge, including in the field of investing. To date, there have already been many book publications that treat the subject of hedging, or in which at least it appears on a few pages.
