![]() ![]() When we diversify a portfolio of stocks, we are reducing the idiosyncratic risk i.e. Stock Portfolio hedge with Index Futures: Let us first learn about the two types of risks – systematic and non-systematic risks. Let us say that we hold technology and banking stocks in our portfolio, then if the technology stocks decline then the banking stocks can act as a hedge.Ĥ. If we buy a number of stocks for our portfolio, then the idiosyncratic risk is reduced. Diversification: Diversification is the most famous form of hedging non-systematic risk. This how the oil hedge works perfectly for an airline stock.ģ. When the price of oil goes up, the airline stock declines but at the same time oil futures would have appreciated. So an investor holding airline stocks can hedge his exposure by buying oil futures. ![]() When the price of oil goes up, one of the input costs for the airline company goes up. Commodity Futures: Companies in the airline industry are dependent on the prices of fuel. And if the price moves around, the hedge will be acting like a protection for the actual stock position.Ģ. Now the additional 300 will be extra as one can never achieve a perfect hedge. Since you are long the stocks, you decide to short the futures market by selling 1 lot of futures. The lot size is 300 and the futures price is Rs. So you decide to hedge this exposure using the futures market. Now you are uncertain about the SBIN stock’s near future. Hedging a single stock position using Futures: Let us assume that you are long 300 stocks of SBIN at Rs. That is why a portfolio of 20 – 21 stocks is considered a safer investment than just investing in 2 stocks like Reliance and Bharti Airtel. Every kind of diversification is a hedge in a way. ![]() The most common hedge is the famous 60/40 stock and bond portfolio held by retirement savers. Hedging is an effective tool that provides protection against downside risk in times of uncertainty. A hedge is an investment in a security that correlates well with the asset to be hedged. Facebook 0 Tweet 0 LinkedIn 0 What Is Hedging?Ī hedge is an investment done with the goal of reducing the risk of adverse price movements in an asset. ![]()
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