Benefits And Limitations of Hedging Analysis

Corporate Finance: Benefits and limitations of hedging

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HEDGING OF FUNDS: BENEFITS AND LIMITATIONS
Table of Contents
Introduction................................................................................................................................3
Usefulness of understanding the concept of hedging.................................................................3
Benefits of hedging....................................................................................................................3
a) It protects the profit of the investor.................................................................................3
b) It balances the overall return on portfolio...................................................................3
c) Save the investors............................................................................................................4
d) Effective risk management strategy............................................................................4
Different types of hedging methods...........................................................................................4
(a) Derivatives...................................................................................................................4
i. Future contracts...........................................................................................................4
ii. Forward contracts....................................................................................................4
iii. Options.....................................................................................................................4
iv. Swaps.......................................................................................................................5
v. Warrants...................................................................................................................5
vi. Diversification.............................................................................................................5
Disadvantages or limitations of hedging strategies....................................................................5
(a) Fee or cost of hedging.................................................................................................5
(b) Reducing or limits the profit of the investors..............................................................5

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HEDGING OF FUNDS: BENEFITS AND LIMITATIONS
(c) Not useful for short term traders.................................................................................5
(d) Not useful for small amount of investment.................................................................6
(e) Complicated methods of hedging................................................................................6
Conclusion..................................................................................................................................6
References..................................................................................................................................7