hedging; financial risk protection

Hedging: Financial risk Protection

Hedging is a concept that aims to minimize or eradicate the possibility of unfavorable changes in, or fluctuations in the prices of, financial instruments. Hedgers use an opposite position in relation to a particular security or market in order to minimize their exposure to risk while still not erasing the possibility of profit. Standard monetary management techniques consist of insurance such as options, futures, and derivatives such as lasting swaps.

For instance, an airline carrier may use financial derivatives to manage the fluctuating price of crude oil for instance, the airline may buy fuel futures contracts to fix the price at which the company has to purchase it in the future. Likewise a person who has invested in stock may exercise his option to purchase put in order to cushion himself from the possibility of a down turn in the stock market. However, hedging can also protect from risks, and as with all things there is typically a trade off; this means that over-hedging can reduce profit margins.

In conclusion, hedging is a effective mechanism that assists participants to tackle market risks far better, and especially, protect equities or business.