Question

Think about the different types of hedges. Select one type of hedge for further exploration. Under what circumstances would the hedge you chose be used? Why would it be the best option for a particular situation? How does this compare to other types of hedges?

Answer 1

A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties.

Types of hedges:-

1-- INSTANT HEDGE

2-- QUICKSET HEDGE

3--DEVON HEDGE

4-- CORNISH HEDGE

Explanation about INSTANT HEDGE:--

The term instant hedge has become known since early this century for hedging plants that are planted collectively in such a way as to form a mature hedge from the moment they are planted together, with a height of at least 1.2 metres.They are usually created from hedging elements or individual plants which means very few are actually hedges from the start, as the plants need time to grow and entwine to form a real hedge.

A 'real' instant hedge could be defined as having a managed root growth system allowing the hedge to be sold with a continuous rootstrips (rather than individual plants) which then enables year-round planting.

CIRCUMSTANCES :--

Hedging has grown to encompass all areas of finance and business. For example, a corporation may choose to build a factory in another country that it exports its product to in order to hedge against currency risk. An investor can hedge his or her long position with put options or a short seller can hedge a position though call options. Futures contracts and other derivatives can be hedged with synthetic instruments.

Basically, every investment has some form of a hedge. Besides protecting an investor from various types of risk, it is believed that hedging makes the market run more efficiently.

---> Using options for hedging is, relatively speaking, fairly straightforward; although it can also be part of some complex trading strategies. Many investors that don’t usually trade options will use them to hedge against existing investment portfolios of other financial instruments such as stock. There a number of options trading strategies that can specifically be used for this purpose, such as covered calls and protective puts.

Most options trading strategies involve the use of spreads, either to reduce the initial cost of taking a position, or to reduce the risk of taking a position. In practice most of these options spreads are a form of hedging in one way or another, even this wasn't its specific purpose.

For active options traders, hedging isn't so much a strategy in itself, but rather a technique that can be used as part of an overall strategy or in specific strategies. You will find that most successful options traders use it to some degree, but your use of it should ultimately depend on your attitude towards risk.