Answer / harshal gandhi

Hedging is a tool to minimize the risks. It is thus like an 'insurance' where one pays a premium but gets an assured amount in case of some uncertain event to the extent of the loss actually suffered on an equally opposite position for which the hedge was done. Thus, hedger is different from arbitrageur and speculators, as the intention here is not to maximize the profit but to minimize the loss.

E.g. In Capital Markets, suppose an investor has an equity portfolio of Rs. 2 lacs and the portfolio consists of all the major stocks of NIFTY. He thinks the market will improve in the long run but might go on a downside in the shortrun. NIFTY today stands at 4300. To minimize the risk of downfall, he enters into an option contract by buying NIFTY-PUT of strike 4300 at a premium of, say, Rs. 100. Thus, the actual amount paid is Rs. 5,000(lot size of NIFTY is 50). Also, the number of NIFTY-PUTs to be bought will vary on the beta of the portfolio so as to completely hedge the positon.
Now, if the market goes up, the investor has no problem as his portfolio is in profit but if the market goes otherwise, his portfolio suffers but the same the put option earns and thus effectively he neither losses not gains.

E.g. In Forex Market, suppose, a textile-goods exporter is to receive $1,000 on a certain future date for a consignment he sends today. He is exposed to a foreign exchange risk. If the rupee appreciates, the exporter will suffer a loss as he will now be able to convert $ into less amount of Rs. To minimize this risk, he enters into a future contract of equal amount to convert these $ into Rs. at a fixed exchange rate. Now, one might think of an uncertain event of rupee being depreciating. But in business sense, his business is not to earn profits from the change in forex-rates but to earn from trading in textile-goods. He thus hedged his position by completely removing the foreign exchange risk.

What About Co-signers?

1 Answers  

---

What is gross profit ratio? What does it indicate?

1 Answers  

---

What is the key difference between private sector banks and the government sector banks?

1 Answers   IBPS,

---

What are the advantages of leasing for the lessee?

1 Answers  

---

How is trial balance different from balance sheet?

1 Answers   State Bank Of India SBI,

---

Can you tell basic difference between devaluation and depreciation of the currency?

1 Answers   IBPS,

---

What is Retained Earnings?

8 Answers  

---

Hi...What is CDR. I have been asked this question one of the Tender documents. Sum of Rs.2,00,000.00 is to be pledged to GOVT in form of CDR. So can any one make me under stand what is CDR and how to fulfill the same. Which bank is advisable for making CDR.

5 Answers  

---

What are the functions of commercial bank in India?

1 Answers  

---

What are your views on the performance of India Paralympics?

1 Answers   IBPS,

---

What is the difference between debt and equity?

12 Answers   ABN AMRO, Religare,

---

What is 'hundi'?

1 Answers  

---