Most of us do hedging in our daily lives. Hedging is nothing but securing or should I say insuring yourself from the future loss. For example: when you a buy a house, you also take house insurance. This is in order to prevent loss in future if at all disaster happens. Now, this is again nothing but hedging. In such simple scenarios, you can afford to do hedging by just paying the premium to insurance companies. But in financial markets, hedging is not so simple.
Most of the companies do hedging to avoid loss in the future. They typically rely on derivatives. Options and future are typically used derivative types for hedging by investors. These investors could be single person, corporate companies, banks etc.
The common example of future in Indian market could be hedging done by some big IT companies in India. Due to depreciating US dollar, these companies use future derivatives and so that they get good exchange rate on the future rate. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign exchange rates. An understanding of hedging will help you to comprehend and analyze these investments.
Cheers,
Amol
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