Hedging can be called as risk management strategy which is employed to limit or alleviate the chances of loss from various price fluctuations of currencies and commodities. It can be also called as an investment done in various ways including getting different insurance cover. In other words, these are measures to survive when inflation hits hard the market. The goal of hedging may vary from one company to other. However, the common reason is that companies when want to reduce the risk of any loss generally tread this path. Though the idea of hedging can be a simple thing to understand, however, carrying out different hedging strategies is not an easy thing to do. It can only be done though good experience and right exposure to this subject.
The way heading is done: In the transaction of hedging, the hedger makes the price fixed at particular level with the goal of ascertaining the cost of production and sales revenue. The market is also seen taking its stand by participating in a tangible method based on speculations as per the moving price and the trend seen around the finance. You will also find a number of arbitrageurs in the market who use these trends to extract profits whenever they come across the number of inefficiencies in the various prices. But at the same time, they make sure the prices they play on the future and spot remain interrelated.
Understanding the long hedge: Buying the hedge is also known as the long hedge. This means that buying the futures contract in order to hedge the cash position. There are number of people like consumers, dealers, fabricators who have fair understanding about the physical market use this idea to lock the market in terms of prices under the idea of hedging. With buying hedge or long hedge you enjoy a number of benefits which includes, firstly, replacing the inventory at pretty low prevailing prices and secondly, protecting the uncovered forward sale of the finished goods or products. The goal of having the long hedge is to protect the buyer against the price rise in the spot market.
Understanding the short hedge: Short hedge is nothing but selling of hedge. This means that the hedger sells his future contract to any other hedger. This is carried out for a number of reasons similar to the long hedge. These includes covering up the price of the finished products, protecting the inventory which is not covered under the forward sales and finally to also cover up the prices of the estimated production of the finished goods. People who are into short hedges are traders and processors who have inventories and who are also involved simultaneously in selling other futures market. Hence they can be short hedger at the same time long hedger depending upon the role you have in the market.
Finally, hedging can be called as two way traffic. Here the gain or loss owing to the variation in price level will be challenged by the number of changes or alterations in the value of futures position. So with proper strategy in place you as business owner can play safe in the market with hedging and survive even the tough financial crunch. In other words a perfect measure to have a secured future.
About the author: Kate is a blogger by profession. She loves writing on technology and autos. Beside this she is fond of cars and fancy dresses. Recently an article on best mobile phone attracted her attention. These days she is busy in writing an article on Kitchen garden.