Hedging

In: Business and Management

Submitted By stansimms
Words 453
Pages 2
Hedging involves taking an offsetting position in a derivative in order to balance any gains or losses to the underlying asset (Sargeant, 2014). Most companies in existence today do this (futures contract) to keep interest rates and other prices stable in case they do go up. For instance, a company that makes doughnuts might by its raw materials (sugar and flour) at an established price with its supplier set for a certain amount of time, which is probably six months to a year, and an airline company might set up bids with fuel companies to purchase jet fuel at a price set for a year, keeping airfares as low as possible. Most investors and analysts view interest rates as today’s biggest threat to the stock market. Mostly rising interest because higher interest makes riskier assets less attractive yet they make less risky assets more attractive (Gad, 2013). Bud Haslett, head of risk management and derivatives for the CFA Institute, mentions that derivatives can decrease risk substantially if used properly to hedge risk exposures but if used improperly, many problems can be caused. Mr. Haslett also mentions how companies that hedge against price or rate fluctuations have the advantage of more consistent cash flow (Brin, 2011). Speculators make bets or guesses on where they hope or think the market is headed. If they believe a stock may be overpriced, they might possibly short sell that stock and wait for the price to hopefully decline so they can buy the stock back to receive a profit. Speculation can be extremely risky simply because speculators are vulnerable to both the downside and upside of the market (Sargeant, 2014). In the business world we consider hedging as a shield to protect our investments. The Word of God can also be considered hedging because we use His word as a shield to protect us. Psalm 5:11(KJV) states, “But let all those that put…...

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