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Hedging Essay

453 words - 2 pages

Hedging involves taking an offsetting position in a derivative in order to balance any gains or losses to the underlying asset (Sargeant, 2014). Most companies in existence today do this (futures contract) to keep interest rates and other prices stable in case they do go up. For instance, a company that makes doughnuts might by its raw materials (sugar and flour) at an established price with its supplier set for a certain amount of time, which is probably six months to a year, and an airline company might set up bids with fuel companies to purchase jet fuel at a price set for a year, keeping airfares as low as possible. Most investors and analysts view interest rates as ...view middle of the document...

Haslett also mentions how companies that hedge against price or rate fluctuations have the advantage of more consistent cash flow (Brin, 2011).
Speculators make bets or guesses on where they hope or think the market is headed. If they believe a stock may be overpriced, they might possibly short sell that stock and wait for the price to hopefully decline so they can buy the stock back to receive a profit. Speculation can be extremely risky simply because speculators are vulnerable to both the downside and upside of the market (Sargeant, 2014).
In the business world we consider hedging as a shield to protect our investments. The Word of God can also be considered hedging because we use His word as a shield to protect us. Psalm 5:11(KJV) states, “But let all those that put their trust in thee rejoice: let them also love thy name be joyful in thee.”
In summary, hedgers are seen as risk averse and try to reduce the risks associated with uncertainty whereas speculators are seen as lovers of risk and tend to bet against the movements of the market trying to profit from fluctuations in security prices (Sargeant, 2014).

References
Sargeant, N. (2014). What is the Difference Between Hedging and Speculation? Retrieved
from www.investopedia.com/ask/answers/06/hedgingversusspeculation.asp.
Gad, S. (2013). How to Hedge Against Rising Rates. Retrieved from www.realmoney.
thestreet.com/articles/04/18/2013/how-hedge-against-rising-rates.
Brin, D.W. (2011). Hedging Still an Effective Tool in Smoothing Company’s Cost Structure.
Retrieved from www.cnbc.com/id/44612831#.
The Holy Bible (King James Version).

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