Hedging to Curb Volatility
Hedging to Curb Volatility
Hedging is the process of insuring an investment against risk. There are many different ways to hedge against market risk, but all types of hedging attempt to gain profits regardless of overall market changes. Successful hedging brings in healthy returns whether a security rises, falls, or stays the same. The main goal of hedging is to reduce the volatility of an investment by offsetting its risk of loss. Of course, there is no guarantee that a hedging strategy will be successful, or that a loss can be avoided in any particular situation.
Things To Know
- Hedging means insuring an investment against risk.
Usually, derivatives are used
Many hedging strategies involve the use of derivatives (securities that derive their values from other securities). Derivatives give investors the future opportunity to buy or sell securities at fixed prices, no matter how much the market changes. Two of the most common derivatives are options and futures. Other hedging techniques involve moving your investments around into different assets as markets change, and borrowing money off one investment to make another. Stocks, bonds, commodities, and even currency can be hedged.
When you hedge, you try to remove some of the uncertainty of an investment.