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.