ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Hedging is investing with the intention of reducing the risk of adverse price movements in an asset. A hedge consists of taking an offsetting or opposite position in a security that is the same as, or related to, the one the investor already has. It’s a defensive move, designed to limit loss.

Detailed explanation-2: -What is a Hedger? Hedgers are primary participants in the futures markets. A hedger is any individual or firm that buys or sells the actual physical commodity. Many hedgers are producers, wholesalers, retailers or manufacturers and they are affected by changes in commodity prices, exchange rates, and interest rates.

Detailed explanation-3: -A classic example of hedging involves a wheat farmer and the wheat futures market. The farmer plants his seeds in the spring and sells his harvest in the fall. In the intervening months, the farmer is subject to the price risk that wheat will be lower in the fall than it is now.

Detailed explanation-4: -Hedgers primarily aim to reduce their risk exposure. They are not risk-loving by nature, unlike speculators. Speculators have a high-risk appetite. Usually, investment banks, mutual funds, and other institutional investors opt for the arbitrage strategy owing to the requirement of technical resources.

Detailed explanation-5: -A forex trader can create a “hedge” to fully protect an existing position from an undesirable move in the currency pair by holding both a short and a long position simultaneously on the same currency pair.