Some FAQs On Hedging

How does hedging work and what are its benefits?

You are investing in one asset and securing the risk in this asset by investing in a second asset. The loss you may incur with the first asset is offset by the profit in the second asset. In this way, you are getting two benefits through hedging as it gives you income through these profits along with reducing the risk.

Where can you implement hedging?

Hedging can be implemented in any underlying asset being traded in the market. You can hedge with currencies, commodities like industrial and agricultural products, securities like shares, equity, mutual funds, interest rates and even weather.

What kind of risks are secured by hedging?

Hedging addresses several risks laying in the trading market, the most important being Industry Risk, Equity Risk, Securities Risk, Foreign Exchange Exposure Risk, Volatility Risk, Industry Risk, Interest Rate Risk, Downside Risk etc.

What are the different types of hedging?

Based on the benefit from hedging, the following are some examples of hedging:

  • Forward Contract
  • Futures Contract
  • Money market
  • Covered Calls
  • Short Straddles

What is a Forward Contract?

It is a non-standardized contract between two parties to sell or buy an asset such as currencies, commodities, etc based on a mutual agreement on the price and date of exchange.

What is a Futures contract?

This is also a contract between two independent sides to buy or sell an asset at a fixed price and date but is a standardized one.

How can hedging help you in the money market?

Numerous contracts, transactions, and exchanges on currencies and money take place in the market and most of them are for short-terms. Hedging gives you security from risks associated with equity, interest rate, mutual funds, bonds etc.

What is a hedging strategy?

Hedging is basically a reduction of risk and the strategy involved is a kind of risk reduction technique, wherein you use flexible techniques to bring down the risk associated with an asset. There is no fixed strategy and it completely depends on the nature of the asset and your decision.

How can you hedge with asset allocation?

You can invest in multiple assets of same or different types so that the risk and profit become balanced from both ends. For example, you can invest 75% in currency and the remaining 25% in another asset with lower or higher stability.

What are other forms of hedging strategies?

You can use Hedging through Structures for reducing downside risk, through options for equity risk, staying in cash strategy for a no-investment trading.

Future of Merger & Acquisition

A combination of two companies into one bigger corporation where one of them is absorbed by the other is the simple definition of Merger, the unity of the assets of two companies into one legally and also the sharing of the liabilities or the debts of the acquired company is inclusive when an M& A happens.

What happens when two companies merge?

  • the existing or the surviving company assumes all the rights of the acquired company including the assets, liabilities, privileges
  • major competition is avoided as mostly the M & A happens when there are two very competitive businesses and once acquired, the competition is lessened and rivalry is negated,
  • number of social benefits, as the scope of reducing the cost, improve the quality of the products and get an increased output with higher profit margins, hence the government to go easy on in the process of acquiring and merging businesses as they are highly regulated,
  • most of the unutilized skill sets of people and technical aspects are increased and are used to full capacity
  • underused assets are optimally used for increasing the output and increase the profitability once the M & A is completed

The market is one of the most upper forces which make companies to even think of M& A; though competition and price are determinants the future ahead has more and more M& A happening due to the market conditions prevailing and the edge over other similar industries in the business.

Factors which influence M& A:

  • most of the strength and weakness of each of the company are tabled and is a major factor in deciding whether it is a viable option as one company may have a higher liability and the other may have less debt to equity ratio which is a lucrative offer
  • a key factor in determining whether the two companies fit in strategically, there should not be a merger or acquisition happening just to take over the liabilities or the customer base, a good equation of similar organizational culture, leadership quality and conducive environment gives the required scope
  • the amount of branding a company has or will have once two companies are merged is yet another influential factor on how good the marketing of the product is done, and how much percentage of market share such products hold, the higher the percentage of market share a product or service has, higher will be the profitability if the branding is done well.


Arbitrage- the easy business solution

Who will not want to make profits with no risk or fewer risk factors affecting your business?Everyone would nod to such an idea. But what this is exactly should be understood before deciding to use such an option. This method of reducing the business risk is termed as arbitrage, which means buying a security from one market and selling it in another market at a better price and claim the profits from it. This is easy income with no great pain or challenge.

But as it is known, every method in a business comes with some kind of a trick inbuilt and we need to beware of all such loopholes before we can invest in such methods. Thus it is crucial to know how to be safe from such divulsions.

Some points to be considered at such times could be:

  1. Higher transaction costs: since the bidding happens at different intervals, the transaction costs may be high as it is separate for each session.
  2. Higher margin requirements: making an estimate of thrice the usual margin will be required to execute an arbitrage strategy which can be a cause of worry for the investors as they have to bear such expenses.
  3. Perfect timing strategy is required: usually, arbitrage opportunities are of short life and they need to be perfectly timed and executed for grabbing the most out of it.
  4. Multiple dimensions: the trader should be clear about the arbitrage process before he could exercise it. The combination of buys and sells will differ according to each currency combination and this will be a disastrous effect when not learned and understood properly causing complete loss of huge sums of money.
  5. Advanced monitoring techniques are necessary: there are some techniques available to monitor and find out what may be the results from the arbitrage of securities. This is a pre-built program which needs a lot of patience to understand and simulate. Only when a trader is capable of handling this, it will make his business of buying and selling easier.

Hence the arbitrage process comes as a business strategy with its covered issues which require proper reciprocation from its users. The keynotes for a successful trading experience are :

  • Maintain trusted and cordial relation with suppliers so they notify about when the product is at a profitable move.
  • Keep a constant check on what may be your barriers and manage them effectively and timely.
  • Have a good communication medium for proper movement of information.

Thus, arbitrage can be friend or foe lies in your decision to look at it.