Blockchain- The Futuristic Technology

We all read futuristic science fiction books and see many movies about the future of mankind. They always depict artificial intelligence and robots and time travel. But now a real futuristic concept has actually revolutionized the present financial world. It is almost as if a space-age currency has come back in time.

Do not be apprehensive

It is a concept that can be explained but yet people find it difficult to understand and use and many countries are yet to create a system that can accept this kind of currency. Due to lack of awareness and understanding, many countries with stronger currencies are clamping down on this futuristic technology as well. This is known as the blockchain technology. This system is the basic foundation of all the digital currencies so far. People in the software industry were the first to start creating this, using their super powerful computers. Now many online services are ready to accept these currencies as payment in lieu of services or goods.

What is the technology

The blockchain is a simple, sincere effort of some software professionals to create a record of every financial transaction that takes place. This creates an open document that can be seen by anyone and it is in public domain. It is complex and people may not access it due to unawareness but it is not a secret or hidden record. It can be understood easily if you visualize a document, that has many transactions recorded across the world. All the transactions are recorded and are always open to everyone. So this data keeps replicating in the records in everyone’s document.

Who governs this currency

It is completely decentralized. That means it is the internet community that keeps a record of this blockchain and money that transfers hands, but no one can control it. It is not minted like paper or metal currency. No government or authority actually controls the mining of information or these currencies. Blockchains can keep increasing in size as these are replicating on increasingly more computers but the number of coins was kept at a fixed number. There are many blockchain currencies launched by various groups but some of them failed to take off. Some are really doing well and well respected, like Bitcoin and Ethereum.

The value of these coins is dynamic and people hear of many rumors about these being banned in certain countries. The fact of the matter is that as the government authorities cannot understand how to control their use or mining, therefore they try to throttle their use in their countries. However, these currencies, at least some of them are readily acceptable and traded online. You can use them once you understand the concept and are comfortable with the anonymity connected with the same.

 

 

Understanding the difference between Hedging and Arbitrage

Introduction:

The financial market has become very successful in the last few years with the evolution of technology and its inputs.There is also the need for the risk management techniques and they have been also well placed for the smooth functioning of the financial sector as a whole.

The stock market trading and also its day-to-day deals have become more in number and also very unique in their functioning. All this calls for the strategies which are effective to deal with these stock changes at a larger level. In order to swim across the tide times in the investment sector, we have the basic two modules to help us. They are Hedging and Arbitrage functions. These two play an essential role in managing investment risk to a great detail.

Role of Hedging:

Meaning and concept– hedging is the use of financial instruments to reduce the effect of investment risk with help of another investment. Investors hedge by procuring two securities that are negatively correlated, thus providing the risk from price changes in the volatile market.

It is not a risk-free trade but a trade with minor risk in it. This makes complete sense of satisfaction for traders to trade. Some of the common methods are option contracts, forward contracts, futures contracts, swaps, and derivatives. These are used to for betting against the upward as well as the downward movements in the market and help the hedger to experience minimal loss.

Hedging is essential in the financial market, gambling and business management though it can be used anywhere for risk aversion. Therefore by actively using the derivatives, the hedging function reduces the potential loss which traders may face.

Role of Arbitrage:

Meaning and concept: Arbitrage is a method of simultaneously investing in securities to prevent the loss of money during price fluctuations in the stock market. More clearly to explain, it is buying a security in one market and investing it in another market to be free of the price changes in both markets affecting the investment.

Arbitrage ensures that price doesn’t change a long way from their fair value at which it can be traded easily. This has also been a solution to eliminate risk in automate trading setups too and has helped the investors to keep monitoring which stock to buy and sell simultaneously.

There are many types of arbitrage functions to suit the different price movements in the market.

Now that the clear difference has been understood, trading in such markets which are risk-prone becomes easy with help of hedge and arbitrage functions.

Hedging – Through the Eyes of a Common Man

Hedging is often understood as insurance against risks. Hedging does mean insurance against any untoward incidents in the financial market, but it is not as simple as getting protection against negative impacts by just paying a premium.

How is hedging different from insurance?

In layman, language Hedging is definitely meant insurance against losses one might have to face while dealing in financial instruments. If we look at the nuances of hedging in the financial market, it is a lot more complicated than insurance. The process of insurance is less time consuming and a lot easier.

For instance fire insurance. We just need to find the right policy and pay the premium periodically. This will take care of protections against any fire accidents on the assets we have insured.

Hedging is lot more complex task. In the financial market that is ever evolving and highly volatile, the investor needs protection against any potential losses caused by price fluctuations of the securities. The impact of the adverse price changes of the investments can be reduced through various hedging techniques. It is essentially managing the risks by picking the right mix of financial instruments that offset the loss caused by the price fluctuations.

Hedging – Is it a perfect science?

Hedging is performed with the help of complex financial instruments called derivatives. Derivative, as the name suggests, derives its value from another commodity or underlying asset. For example – A trader dealing with corn is worried about the increase in corn prices. He can enter into a forward contract to buy corn at a specific price in future. In the event of price rise, he is unaffected by it as he can buy it at the strike price agreed upon. But in case the price falls he will still have to buy corn at the strike price itself. The success of the hedge is not guaranteed. It only helps in offsetting the risk but does not guarantee a profit. It does not qualify to be a perfect science due to the unpredictability involved in the success of hedges.

Hedging in the financial scenario is usually performed by selecting two financial instruments which have an inverse relationship. The investors will have to select the investments strategically to be able to benefit from the hedging proposal.

Who performs the task of hedging?

One needs to understand the nitty-gritty’s of the various financial instruments to perform hedging. Individual investors are less likely to perform this as they might not necessarily be worried about the short-term price fluctuations. It requires the skill of an investment manager who has a fair amount of experience dealing with various financial instruments. Even though the task of hedging is best done by the professionals in this field, it is important that the investors have some idea of this complex process.

Hedging also comes with a cost. It will definitely eat into the investor’s profits. The investor needs to decide if he needs more profit or protection against any contingent losses.

 

 

Importance of Hedging in Capital Investment

How much is the risk involved? Becomes the primary question in any means of trade or business, where the exchange of goods or services is as important as to the risk involved in such trading. Today, when companies are engaged in multimodal activities and are into various segments of the business, one of the essential assumptions would be how much risk to be taken and gain maximum returns on the capital invested. Let’s take a quick look at roles of hedging in reducing the risk and safeguarding the LTC among different businesses.

Protects the value in the business

Business houses which greatly deal in foreign exchange, import and export of foreign stock face a steep increase/ decrease in the exchange rates of currencies. Since they operate with different countries the ever-changing rise and fall of currency rates affect their operations in large. Currency hedging mitigates the uncontrollable and unforeseen risks of the trader or investor. Assuming if that Taurus Company which is a multimodal company based in India invested in Canadian market which was an appreciating market would be in an advantageous scenario due to the increased currency value in the market investing.

Hedging tries to fix prices of commodities

Farmers and other base level manufacturers use the hedging to come over the inefficiencies at the prices of their commodities they manufacture. Base level manufacturers like textile, steel, a farmer etc, invest in a huge quantity of raw materials and expect a certain price for the commodity manufactured have to secure the prices against the tremendous fluctuation of prices. To safeguard against the risk they hedge against the future price of the commodity on a contractual agreement with the retailer on fixed premiums. So he is protected against the increase/ decrease prices if the commodities.

Equity market risk can be reduced

The main essence of an Equity market is the high time volatility. Steep increase/ decrease in the prices of the stocks at regular intervals can make can make or break an individual’s portfolio. Hedging is a kind of insurance which u take against the risk of falling markets. It can be held for a particular moment of stock that is when you expect the markets to be on particular momentum and how your invested stock reacts to that momentum. Hence hedging creates an impact on the returns on investment.