How do you hedge trades?

How do you hedge trades?

Investors typically want to protect their entire stock portfolio from market risk rather than specific risks. Therefore, they would hedge at the portfolio level, usually by using an instrument related to a market index. One can implement a hedge by buying another asset, or by short selling an asset.

Hedging can be done with below three assets:

Forward Contract: It is a non-standardized agreement to buy or sell underlying assets at a determined price on the date agreed by two independent parties involved. Forward contract covers various contracts like forward exchange contracts for currencies, commodities, etc.

Futures Contract: It is a standardized agreement to buy or sell underlying assets at a determined price on the specific date and standardized quantity agreed by two independent parties involved. A futures contract covers various contracts like commodities, currencies future contracts, etc.

Money Markets: It is one of the major components of financial markets where short-term lending, borrowing, buying and selling is done with the maturity of one year or less. It covers many forms of financial activities of currencies, money market operations for interest, calls on equities where short-term loans, borrowing, selling and lending happen with a maturity of one year or more.





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