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Assignment on Hedging (PDF)

   

Added on  2020-10-22

7 Pages1679 Words338 Views
FINANCE MINI PROJECT
Assignment on Hedging (PDF)_1
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1MAIN BODY...................................................................................................................................11. Defining two arguments against hedging and two arguments for hedging.............................12. Discussing agree or disagree with J. P. Morgan approach and providing suggestions for ....2improving approach....................................................................................................................2CONCLUSION................................................................................................................................4REFERENCES................................................................................................................................5
Assignment on Hedging (PDF)_2
INTRODUCTIONEvery financial transaction or investment have some amount of risk associated with itselfwhich cannot be eliminated fully. Investor before making investment in any fund always ensurethe amount of return it is giving along with risk. To reduce or mitigate risk associated withinvestment, a technique is utilized named as Hedging. It is a practice of taking a position byhedger in one market so as to offset and protect against the risk as well as potential losses orgains which may be incurred because of movement in opposing market or investment. Thus, ahedge is an investment strategy undertaken with objective of reducing the risk of adverse pricemovements in asset. The report will discuss about different hedging benefits it provides toinvestors along with some drawbacks. Further, report emphasis will be made on best practicesadopted by J. P. Morgan in context of Foreign Exchange Risk Management. At last, report willstreamline about suggestions made for improving the hedging approach of J. P. Morgan.MAIN BODY1. Defining two arguments against hedging and two arguments for hedging.Hedging is a way of protecting oneself against all the financial loss or adversecircumstances arising from Forex market. It is defined as a risk management investment strategywhich is used by investors in minimizing or offsetting the probability of occurring loss becauseof fluctuations taking place in the prices of commodities, foreign currencies or any securities.Hedging is considered as a transfer of risk without involving in buying of any insurance policies.Hedging can be done by using different financial instruments such as Forwards, Options, Swaps,Futures, Swaption, Exchange traded funds etc. Argument against hedging are as follows:1.Hedging strategy involves cost thus minimizes profit level - Risk and reward areconsidered as a proportional factor to each other i.e. reducing risk means reducing profits.Process of hedging is not carried out for free, it incurs some cost amount like premium orbrokerage (Froot, 2019). Cost of hedging reduces the risk of investors but also leads tominimization of overall investor profit.2.Not suitable in favourable or positive market condition – Hedging is a mechanismwhich is adopted by investor to protect against unfavourable price movement in thesecurities or assets. If the market is performing well or having a positive trend movementthen hedging offer little benefits to investor. Therefore, investor rather than adopting1
Assignment on Hedging (PDF)_3

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