ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Forward market hedging protects investments, financial assets, and instruments by minimizing possible losses. Hedging is a strategy most investors use to safeguard future outcomes that will put their investment at a disadvantage.

Detailed explanation-2: -Forward contracts are agreements to lock in a prevailing rate of exchange for a set period of time, usually up to two years. These types of contracts are used by financial institutions to help hedge against uncertain market fluctuations.

Detailed explanation-3: -The key difference between hedging and forward contract is that hedging is a technique used to reduce the risk of a financial asset whereas a forward contract is a contract between two parties to buy or sell an asset at a specified price on a future date.

Detailed explanation-4: -Forward contracts are mainly used to hedge against potential losses. They enable the participants to lock in a price in the future. This guaranteed price can be very important, especially in industries that commonly experience significant volatility in prices.

Detailed explanation-5: -Margin money is required to maintain a position in the futures market. A forward cash contract typically does not require margin deposits. Hedging involves extra marketing cost, including brokerage commissions and interest on margin money. These extra costs may average 0.5 to 2 cents per bushel.