Corporate Finance: Hedging of Funds, Benefits, and Limitations

This report provides a comprehensive overview of hedging in corporate finance, examining its definition, benefits, and limitations. Hedging is presented as a risk management strategy designed to protect investors from market volatility. The report details the benefits of hedging, including profit preservation, risk minimization, portfolio diversification, and securing returns through techniques like future and forward contracts. It also highlights the limitations of hedging, such as its cost, potential to limit profit, unsuitability for short-term traders and small investments, and complexity for average investors. Different hedging methods, including derivatives and diversification, are explained. The conclusion emphasizes the overall benefits of hedging for investors in volatile markets. References to academic sources are also provided to support the analysis.

Corporate Finance:
Hedging of funds
Benefits and limitations

Definition and concept of hedging
Hedging is a risk management strategy by which the investors
can be protected from suffering loss due to the volatility or
fluctuations in the market.

Benefits of hedging
 It helps the investor in saving his profit.
 It saves the return on investment by minimizes the risk over
investment.

Benefits of hedging
 It helps in balancing the overall risk of portfolio by
diversifying the risk.
 Using diversification strategy of hedging, investors can save
their return.

Benefits of hedging
 Future contracts and forward contracts of hedging
techniques, helps the investors in getting ensured about
certain amount of return.

Benefits of hedging
 It helps the investors in securing his money from the volatility
of the market.

Different types of hedging methods
Derivatives: This is a risk management strategy in which the
value of underlying asset is derived by contracts.

Various types of derivatives are as
follows:
Future
Contracts
Forward
Contracts
Put
Option
Call
Option Swaps

Different types of hedging methods
Diversification: In this strategy the whole amount of investment
is diversified into many investment methods so that the risk can
be reduced or minimized.

Limitations of hedging
 Hedging is a costly method which minimizes the profit of the
investments.
 It limits the profit of the investors because it set a prefixed
amount of profit.

Limitation of hedging
 It is not useful for short term traders.
 It is not useful for small amount of investments.

Limitations of hedging
 Hedging methods are very complicated to be understood by
normal investors.