Hedging essentially refers to an individual or a company safeguarding the assets against an adverse occurrence. The easiest example is purchasing of car insurance. It is not necessary that a car may be stolen; purchasing insurance is a way of hedging against car-theft.

Hedging techniques are employed by investors – individual and corporate – to mitigate their exposure to different risks. In financial terms, hedging refers to employing market tools tactically to safeguard against the danger of any unfavourable price movements. The instruments that are used to hedge against risks include the following:

  • Stocks and bonds
  • Insurance
  • Exchange traded funds
  • Forward contracts
  • Options
  • Future contracts

An option refers to an agreement that provides the purchaser the privilege to purchase or sell an asset at a predetermined price on or before a specified date. There is no obligation on the part of the purchaser to make the purchase. Akin to a stock or bond, an option is also a security. Officially, it is a financial derivative with specific terms and attributes. Options are of two types:

  • Calls (buying a call option)
  • Puts (selling a put option)

Hedging is often done on prices of agricultural products, fuel consumption, stock prices and employee stock exchange. 

SIGNIFICANCE

The aim of all investors is to mitigate their risks. Hedging is the simplest way to do the same. Options are commonly used across the globe to reduce risks. Hence, it is crucial for all investors to understand hedging and options.

Timing is of essence when you wish to use Hedges and Options. You have to watch the movements of share/ commodity prices to know exactly when the right time to enter the market is and when you should exercise your option. It may, however, not be possible for you to keep such a watch, since you have many other businesses to handle.

Learn all about hedges and options from experts. We have consultants, who will not just advise you in the best possible manner, but will also ensure that you are firm with the basics. Contact us to get a quote now and benefit from expert advice. 

ASSIGNMENT

1)      What is the difference between a call and a put?
A call offers the holder an option to purchase an asset at a specific price and specific time while a put provides the holder an opportunity to sell assets at specific prices and specific times.

2)      Who are holders and writers?
Holders refer to individuals who purchase options while those who sell options are referred to as writers.