Tuesday, September 30, 2014

What is hedging in derivatives? - Power Bull Academy.

Dear Investors,
   Narayanan here, One of our well wisher investors and customer asked me what is Hedging. I am trading in derivatives but heard this term but dont know the real meaning out of it.  First I appreciate him to be honest to admit the ignorance. When any person keep their mind open instead of saying "I know" for everything and anything he is a loser. No body master in none or jack of all trades. 

I will explain in simple term but I need to go back on 1833 century chicago stock exchange, IL. Hedging mainly used when price volatility is more in the commodity or stock or bullion. Initially it happened with commodity because 

Farmer 1: He/she harvest wheat and need to sell merchant or vendor. It will take normally 2 or 3 months to provide the goods. 

Okae thats fine - Now the question is about pricing how much I need to pay u to get back the goods. May a tone or more.

The big challenge raising and bothering the farmer and vendor for many days is pricing. Why! Now you are selling wheat with price of 1500$ per tone. After two months a storm or natural calamity affects the production of wheat which surge the price of wheat to 1800$. Who is the loser? Farmer and the vendor is the gainer in big way. So it will end up with confusion or it can happen in other way also.

After deep research they found derivatives is the best solution to contain the problem: A farmer sells the instrument to vendor kind of forward contract (happens between individual only). When the price increase buyer will pay more to farmer and if it decreases farmer will pay more to vendor. After that they bring into equities. A future contract can happen more than two individuals. He can pass the contract where as forward it is not feasible. It went well as the exposure is high. 

I hope explained the detail in a limited text and dont want to take much of your time and my time. Why we are writing to all instead of replying back to the person. Because of one feedback provided from our customer. We listen you and Done! Its gives benefit to all. Who is the gentle person. See the snapshot and highlighted text. Remember when you give feedback we read and rate you. I really dont know anything about Ashish to be honest but the thirst of attitude to learn more is high. Definitely this feedback written from the heart not just typing great prediction or good work or nice show. When he takes time definitely everyone will be benefited.  Thank you Ashish.

Best Wishes,
Best Wishes,

Power Bull

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