Hedging is called the process of insuering against potential losses and the desire to minimize risk. This process takes place relatively with price fluctuations in the financial market, i.e. price fluctuations in the financial market. However, most investors hedge against options or futures. The fact is that most investors do not know how this process takes place and will never resort to it.
Why do you need to know this as an investor? At least because most private investors don’t know about it and lose a lot. If you are interested in short-term price fluctuations and not long-term investments – this article is for you.
Read more about hedging
Hedging is an insurance process for potential risks that arise when trading in the financial market. It occurs by buying or selling a fixed asset in the future in order to minimize the risks associated with unforeseen price fluctuations in the near future. Simply put, if two hedge companies are aware of the price at which the transaction will be made in the future, they will insure themselves against financial losses caused by price fluctuations.
which minimises risk, we minimize the amount of potential profit because the two concepts are interrelated. This means that if what we are insured from, we will not lose money, but we will not earn.
It is important to say that by protecting ourself not only we protect ourself from financial losses, but we are also limited to potential profits. Therefore, before applying this tactic in practice, it is worth understanding that its purpose is not to increase earnings, but to reduce financial losses.
Consider a practical example of reassemplation.
Imagine you have Gazprom shares. You think the share price will rise in the long run. However, worrying about a short-term decrease in the value of assets, you hedge against this decrease – you buy an option with the possibility of reselling Gazprom shares at a certain price. If your assumptions become obvious, you will resell the shares at the same agreed price.
Another example is larger. Imagine a company consuming agricultural products to produce its product (for example, a beer producer consumes barley). If this company plans to reinsurance against an unexpected increase in the price of raw materials (barley), it buys a futures contract, which should be set a price at which it can be bought in the future. If the cost of raw materials decreases, the company overpays.
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