Learn more about the advantages and disadvantages of hedging.
Advantages of Hedging
Following are the various advantages of Hedging:
- Futures and options are very good short-term risk-minimizing strategy for long-term traders and investors.
- Hedging tools can also be used for locking the profit.
- Hedging enables traders to survive hard market periods.
- Successful hedging gives the trader protection against commodity price changes, inflation, currency exchange rate changes, interest rate changes, etc.
- Hedging can also save time as the long-term trader is not required to monitor/adjust his portfolio with daily market volatility.
- Hedging using options provide the trader an opportunity to practice complex options trading strategies to maximize his return.
Disadvantages of Hedging
Following are the disadvantages of Hedging:
- Hedging involves cost that can eat up the profit.
- Risk and reward are often proportional to one other; thus reducing risk means reducing profits.
- For most short-term traders, e.g.: for a day trader, hedging is a difficult strategy to follow.
- If the market is performing well or moving sidewise, then hedging offer little benefits.
- Trading of options or futures often demand higher account requirements like more capital or balance.
- Hedging is a precise trading strategy and successful hedging requires good trading skills and experience.