The long and short of Hedging:
Hedging through futures may involve either buying or selling an asset in the futures market. Purchase in the Futures market is called as 'Long Hedge'. If hedging is done by selling in the futures market, it is called as 'Short Hedge'.
For example, you may have a lot of money with you and you may also want to buy a particular share. If you buy in the spot (cash) market, the price may go up immediately and you may get less number of shares. So, you buy from the futures market. Then, slowly as and when you make cash purchases, you unwind your futures position. This is 'long hedge'.
Similarly, if you have many shares to sell, you may sell them in the futures market so that the cash price is not brought down. This is 'short hedge'.
If there is no futures market for a particular item, you may enter into contracts for a similar product like diesel instead of aviation turbine fuel (ATF). This is called as 'Cross Hedge'. The assumption is the prices of diesel and ATF will move in a similar fashion.
Hedging through futures may involve either buying or selling an asset in the futures market. Purchase in the Futures market is called as 'Long Hedge'. If hedging is done by selling in the futures market, it is called as 'Short Hedge'.
For example, you may have a lot of money with you and you may also want to buy a particular share. If you buy in the spot (cash) market, the price may go up immediately and you may get less number of shares. So, you buy from the futures market. Then, slowly as and when you make cash purchases, you unwind your futures position. This is 'long hedge'.
Similarly, if you have many shares to sell, you may sell them in the futures market so that the cash price is not brought down. This is 'short hedge'.
If there is no futures market for a particular item, you may enter into contracts for a similar product like diesel instead of aviation turbine fuel (ATF). This is called as 'Cross Hedge'. The assumption is the prices of diesel and ATF will move in a similar fashion.
No comments:
Post a Comment