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HEDGING STRATEGIES. WHAT IS HEDGING?. Hedging is a mechanism to reduce price risk Derivatives are widely used for hedging Its main purpose is to reduce the volatility of a portfolio, by reducing risk Hedging does not maximizes the return it just reduces the variation in the return.

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## HEDGING STRATEGIES

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**WHAT IS HEDGING?**• Hedging is a mechanism to reduce price risk • Derivatives are widely used for hedging • Its main purpose is to reduce the volatility of a portfolio, by reducing risk • Hedging does not maximizes the return it just reduces the variation in the return**HEDGING STRATEGIES**• One of the popular strategies for hedging is : "If you are long in cash underlying - Short Future; and If short in cash underlying - Long Future“ • For e.g. If one has bought 100 shares of say Reliance Industries and want to Hedge against market movements, he has to short an appropriate amount of Index Futures. This will reduce his overall exposure to events affecting the whole market**WHERE HEDGING STRATEGIES ARE USEFUL**• Reducing the equity exposure of a Mutual Fund by selling Index Futures • Investing funds raised by new schemes in Index Futures so that market exposure is immediately taken • Partial liquidation of portfolio by selling the index future instead of the actual shares where the cost of transaction is higher**HEDGING STRATEGIES FOR INVESTORS**• Hedging Strategy #1 – Dedicated Short Bias • Hedging Strategy #2 – Fixed Income Arbitrage • Hedging Strategy #3 - Market Timing • Hedging Strategy #4 – Aggressive Growth • Hedging Strategy #5: Opportunistic**To hedge short underlying position with options**• Buy call • Sell put • Buy call spread • Sell put spread • Buy semi-futures**To hedge long underlying position with options**• Sell call • Buy put • Sell call spread • Buy put spread • Sell semi-futures

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