w4.3 - Meghraj Patil MBA 6001 Instructor: John Halstead...

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Meghraj Patil MBA 6001 Instructor: John Halstead Hedging Strategy Hedging to reduce market risk by taking a position opposite of what you already have. For example say you have $1,000 in foreign currency, you can sell a futures contract covering the $1,000 today and lock in its price until you need the money. By hedging, you will be protected from any fluctuations in that currency. The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and we are properly hedged, So, hedging occurs almost everywhere, and we see it every day. There are many ways to create a hedging strategy using derivatives in this case. In the case of GM and Ford, I suggest that continue holding the stock in portfolio because if the current stock price is lower or equal to the purchase, then we will keep going and buy, up to holding in the automobile stocks. Now, when the price of automobile stocks goes down in the next six months and I will be forced to sell it.
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