Derivatives Fundamentals

Hedging vs Speculation

Learning Outcome

What is Hedging?

Hedging is a risk management strategy used to reduce or eliminate the potential loss from adverse price movements in an asset. It involves taking an offsetting position in a related security, derivative, or asset so that a loss in one position is compensated by a gain in another.

Detailed Example

The core objectives of hedging revolve around certainty, protection, and financial stability:

1. Price Risk Elimination
Lock in future prices to avoid adverse price movements. An oil marketing company like BPCL hedges crude oil imports using futures to ensure stable costs.

2. Cash Flow Certainty
Stabilise revenues and costs for better financial planning. Exporters hedge forex receipts so ₹ earnings are predictable.

3. Balance Sheet Protection
Prevent large unrealised losses from disturbing net worth, crucial for MNC subsidiaries.  

4. Regulatory / Compliance Hedging
RBI mandates hedging of external commercial borrowings (ECBs). SEBI permits index hedging for institutional investors.

Core Concepts (Slide 6)

Core Concepts (Slide 7)

Core Concepts (.....Slide N-3)

Summary

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Which platform is mainly used for professional networking and B2B marketing ?

Which platform is mainly used for professional networking and B2B marketing ?