![Strategies of hedging: definition, benefits and risks for traiders](https://globalcryptoexpert.com/wp-content/cache/thumb/f8/18bc6d9d93f8ff8_282x160.jpg)
Disclaimer: this article is for informational purposes only and does not constitute a solicitation to fund or to speculate in any form – remember that all investments involve risk.
![hedging example](https://globalcryptoexpert.com/wp-content/uploads/2024/07/hedging-example.jpg)
Hedging method: explained
The basic idea of hedging is to create opposite positions that offset the risks and protect against currency, interest rate, and inflation fluctuations.However, it is not necessary to resort to it in all cases. And in all investment styles.For example, many people who follow long-term buy-and-hold strategies do not use them at all. The fact is that even with large drawdowns, the market recovers one way or another.
![Hedging method](https://globalcryptoexpert.com/wp-content/uploads/2024/07/Hedging-method.jpg)
Hedging fixed-value items
Fixed-value items are items that have a fixed cost. For example, non-convertible bonds with a fixed coupon issued by a company with annual interest payments. Or a fixed interest rate on a loan.
Hedging variable-value items
And variable cost items have variable value. Anyways, they include:- variable interest loans;
- the lion's share of foreign exchange transactions;
- variable debt obligations.
Hedging example
The following are examples of hedging.Example 1 - Conceptual
Hedging can essentially cover all businesses that deal with finances. Now we suggest a little dreaming. Imagine an international organization engaged in the production of high-tech household appliances and supply.![Hedging variable-value items](https://globalcryptoexpert.com/wp-content/uploads/2024/07/Hedging-variable-value-items.jpg)
Foreign currency. Say, in three forms: yuan, US dollar, euro. All of them will fluctuate in value, potentially leading to both gains and losses.
Example 2 – Fixed-value items
Suppose the same organization has issued a non-convertible bond with an interest rate of 10% per year. It pays it off annually. And suddenly the head has a suspicion (no matter how well-founded it is) that the interest rate at the time of the next coupon payment will be lower than 10%.![Fixed-value-items](https://globalcryptoexpert.com/wp-content/uploads/2024/07/Fixed-value-items.jpg)
Example 3 – Variable-value items
Let's assume that the organization (still the same one) has a loan of $500,000 on which it pays interest every six months at the current interest rate + 0.70% per year. The current interest rate is 6% per annum, but in the future it will rise to 8%.It may rise, to be perfectly correct.So the company rush to make an agreement with the bank whereby it will pay a fixed rate of 6% + some additional amount.
Example 4 - Forward hedging examples
Forward contract is the earliest and oldest form of risk limitation. It was born in grain trading.![Forward hedging examples](https://globalcryptoexpert.com/wp-content/uploads/2024/07/Forward-hedging-examples.jpg)
If the price per bushel falls a month later, it could be a financial disaster for the farmer.
Hedging examples: strategies
There are several types of hedging. Below are the main ones. Straight (direct) – perhaps the most common. Straight means having a position in the portfolio and opening a mirror one in relation to it.
![Hedging examples strategies](https://globalcryptoexpert.com/wp-content/uploads/2024/07/Hedging-examples-strategies.jpg)
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