Advantages and Disadvantages of Hedging

Advantages and Disadvantages of Hedging

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.

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