Table of Contents
1 . Hedging Strategies to Reduce and Manage Market Volatility
Risk is an important factor in investment and financial markets, and it has heightened in present times due to global and domestic factors. Luckily, hedging strategies can help reduce risk in a volatile market based on your asset or asset portfolio.
We have compiled a list of ways to minimize uncertainty and risk in any market using hedging strategies. For spot trading in agricultural commodities, check out Agrodity’s website.
Hedging Strategies to Reduce and Manage Market Volatility You can reduce uncertainty through portfolio construction, index indicator, and options. 1. Portfolio Construction One of the ways to minimize market risk is by constructing a portfolio. Based on Modern Portfolio Theory (MPT), you can diversify your assets in groups to manage volatility. This theory uses statistical tools to determine the expected return of a certain amount of risk. MPT also assesses the link between various assets and their volatility to construct an optimal portfolio. Many investors, traders and financial institutions use this risk-hedging strategy to manage risk. They use an efficient frontier – a curved line showing a relationship between return and risk. Keep in mind that risk tolerances vary from investor to investor, and this strategy helps find the right portfolio for each investor. 2. Options
Options is a useful tool for managing risk. Investors buy put options to hedge stock. It protects their investment from a downside move. Put options gain value when the underlying security’s price goes down. That said, this method does have a drawback. It takes a premium amount to buy options, and they’re prone to time decay which means they lose value as the expiration nears. Investors use vertical put spreads to minimize premium amounts, but then it also limits the protection against a downside move. Options can only minimize risk for one asset or individual stock. Hence, investors with diverse holdings can’t hedge individual positions. 3. Index Indicator Another way to minimize risk is with the volatility index indicator. These indicators measure the volatility of puts, at-the-money and calls. In other words, it’s a fear gauge, so the volatility increases as the index rises.
While these hedging strategies help minimize market risk, they cannot eliminate the entire risk. Traders must have certain risk tolerance and realistic goals. If you’re looking for a huge money-making opportunity, check out Arodity – an agricultural commodities spot exchange.
Our platform helps wholesalers, traders, and farmers to engage in online trading of agricultural products such as wheat, corn, and soybean at the best spot prices. Register yourself now or book a demo first!
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