Question

what is this meanings?? (energy econ)

know the steps to construct energy hedges
1.what is the size of your exposure?
2. what do you fear happening (what is your risk)?
3. what position do you take in the futures to reduce risk. (lock in sale or purchase price)
4. how many contracts to use?

Answer 1

1.

What do we understand by the word hedge? The word hedge refers to protection against unfavorable price movements. It can involve protection against downsides if you are long on the market and protection against upsides if you are short in the market. In other words, hedging is nothing but an insurance against the volatility of your portfolio. You incur a cost to hedge but that also protects you against deep losses in a worst-case scenario. For the purpose of hedging, we shall only talk about long positions and not about short positions. There are 3 ways to hedge your exposure in the market when you are holding on to equity market positions as an investor or as a trader.

• Hedging with the use of stock futures

• Hedging with the use of long put options

• Protection with the help of Beta Hedging

2.In fixed income markets, basis risk arises form changes in the relationship betweeninterest rates for different market sectors. ... If a portfolio holds junk bonds hedged with short Treasury futures, it is exposed to basis risk due to possible changes in the yield spread of junk bonds over Treasuries

Basis risk is defined as the inherent risk a trader. Traders have important psychological skills that give them a distinct trading edge. takes when hedging a position by taking a contrary position in a derivative of the asset, such as a futures contract. Basis risk is accepted in an attempt to hedge away price risk.

3.Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investorshedge one investment by making another. ... A reduction in risk will always mean a reduction in potential profits.

Here are eight ways to reduce stock market risk in your retirement portfolio:

1. Sell individual stocks and equity funds. ...
2. Buy bond funds or ETFs. ...
3. Purchase real estate. ...
4. Open a self-directed IRA. ...
5. Build a municipal bond portfolio. ...
6. Buy a protective put option. ...
7. Lower risk with inverse ETFs. ...
8. Hire a financial planner.

4.Futures contracts are one of the most common derivatives used to hedge risk. Afutures contract is as an arrangement between two parties to buy or sell an asset at a particular time in the future for a particular price. ... The ultimate goal of an investor using futures contracts to hedge is to perfectly offset their risk.