Hedging, in finance, is the practice of safeguarding one’s resources (investments, income, etc.) from losses due to market volatility. The method often involves investing in a product to offset the risk of adverse price movements in another investment.
How does Hedging work?
It is taking the opposite position to offset the loss of another stock. It involves investment in derivatives like options to reduce risk.
Is hedging illegal?
Hedging is considered legal in the US markets and even Indian Markets. The CFTC has posed certain restrictions on Hedging because Hedging on the same currency pair leads to more benefits for brokers rather than traders. Hedging is considered legal by brokers of mainly the Eurozone, Australia, and Asia.
What is an example of Hedging?
In our walks of life, insurance can be considered to be a hedging product. However, mostly, Hedging is used to denote strategies used in markets with derivatives, currencies, commodities, stocks, interest rates, etc.
What is the primary purpose of Hedging?
Both retail investors and institutional investors engage in Hedging to manage risk and minimize their exposure to risk and its negative impact.