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Hedging

Hedging is often referred to as a means of dealing with risk.

Describe some techniques that fall under this concept that could help you deal with an anticipated price increase.

Describe the pros and cons of hedging versus not hedging the risk. Use an example where possible.

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Hedging techniques
Hedging is often referred to as a means of dealing with risk. Describe some techniques that fall under this concept that could help you deal with an anticipated price increase. Describe the pros and cons of hedging versus not hedging the risk. Use an example where possible.

Some of the hedging techniques that can be used as a means for dealing with the risk of anticipated price increase are forward contracts, futures, and options. Usually, the risk of price increase is faced by a company when it has to buy raw materials in future. A forward contract is a non-standard contract between two entities to buy or sell the raw material at a priced determined today. So, with a forward contract the risk against unexpected price rise is mitigated. A future is a standardized contract to buy an underlying ...

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