INTRODUCTION TO HEDGING AND ITS IMPORTANCE
by Sam Titus
1. What is Hedging?
1.1. Hedging is a risk management strategy used to mitigate potential losses from adverse price movements in financial markets. It involves taking a position in a financial instrument that offsets the risk of an existing position
2. why hedging
2.1. 1. Offsetting Risk 2. Risk Mitigation 3.Not Eliminating Risk
3. Importance of Hedging in Financial Markets
3.1. 1. Stability and Predictability 2. Investment Confidence 3.Risk Management
4. Reducing Risk Exposure
4.1. Risk Reduction
4.1.1. Hedging reduces potential losses from adverse price movements by offsetting exposure with an opposite position.
4.2. Controlling Losses
4.2.1. Hedging sets a limit on potential losses, preventing catastrophic outcomes in unpredictable market conditions.
4.3. Protecting Profit
4.3.1. It safeguards existing profits from market downturns, allowing businesses to maintain financial stability.
5. Hedging Strategies: Futures, Options, Swaps
5.1. Futures
5.1.1. Agreements to buy or sell an asset at a predetermined price and date.
5.2. Options
5.2.1. Give the holder the right, but not the obligation, to buy or sell an asset at a specific price.
5.3. Swaps
5.3.1. Exchange of cash flows based on different underlying assets, often used to manage interest rate risk.