GIV helps you minimize the risk of devaluation of your accounts.
what is hedging?
A hedging strategy is a set of measures designed to minimize the risk of adverse movements in the value
of assets or liabilities. Hedging strategies usually involve taking an offsetting position for the
related asset or liability.
Currency hedging is one of the most common hedging strategies. Companies operating internationally, who work with a range of currencies need to minimize the risk of devaluation of their accounts receivable in foreign currencies, as well as of their functional currency devaluing against others in which they have payments due.
A wide range of products with diverse prices and degrees of complexity are available, from forward contracts to futures, options and other derivative products.
We can protect your business by finding the best hedging solution to minimize or offset the chance that your
assets will lose of value. Derivatives such as forwards contracts, futures, swaps, insurance and options may
be used to hedge (wholly or partially) your portfolio’s exposures. This strategy is best suited for
investors who aim to offset their floating trades or to minimize any potential losses that may be incurred
by price movements or by the impact of negative events on investments.
At each stage, our professional team will support you in achieving best hedging result.
How Does Hedging Work?
The most common way of hedging in the investment world is through derivatives. Derivatives are securities that move in correspondence to one or more underlying assets. They include options, swaps, futures and forward contracts. The underlying assets can be stocks, bonds, commodities, currencies, indices or interest rates. It’s possible to use derivatives to set up a trading strategy in which a loss for one investment is mitigated or offset by a gain in a comparable derivative.
The Asset Manager generally employs the following hedging strategies to mitigate losses:
1. Asset Allocations: This is done by diversifying an investor’s portfolio with various classes of assets. For instance, you can invest 40% in the equities market and the rest in stable asset classes. This balances your investments.
2. Structure: This is done by investing a certain portion of the portfolio in debt instruments and the rest in derivatives. Investing in debt provides stability to the portfolio while investing in derivatives protects you from various risks.
3. Through Options:This strategy includes options of calls and puts of assets. This facilitates you to secure your portfolio directly.
Categories of hedgeable risk
There are varying types of financial risk that can be protected against with a hedge. Those types of risks include:
Commodity risk:The risk that arises from potential movements in the value of commodity contracts, which include agricultural products, metals, and energy products.
Credit risk:The risk that money owing will not be paid by an obligor. Since credit risk is the natural business of banks, but an unwanted risk for commercial traders, an early market developed between banks and traders that involved selling obligations at a discounted rate.
Currency risk:(also known as Foreign Exchange Risk hedging) is used both by financial investors to deflect the risks they encounter when investing abroad and by non-financial actors in the global economy for whom multi-currency activities are a necessary evil rather than a desired state of exposure.
Equity risk:The risk that one's investments will depreciate because of stock market dynamics causing one to lose money.
Volatility risk:is the threat that an exchange rate movement poses to an investor's portfolio in a foreign currency.
Interest rate risk:The risk that the relative value of an interest-bearing liability, such as a loan or a bond, will worsen due to an interest rate increase. Interest rate risks can be hedged using fixed-income instruments or interest rate swaps.
Weather hedgingThis might seem interesting, but hedging is possible tin this area as well.
Advantages of hedging
• Hedging limits the losses to a great extent.
• Hedging increases liquidity as it facilitates investors to invest in various asset classes.
• Hedging requires lower margin outlay and thereby offers a flexible price mechanism.
Hedging provides a means for traders and investors to mitigate market risk and volatility. It minimizes the risk of loss. Market risk and volatility are an integral part of the market, and the main motive of investors is to make profits. However, you are not in a position to control or manipulate markets in order to safeguard your investments. Hedging might not prevent losses, but it can considerably reduce the effect of negative impacts.