Next hedging helps in increasing the liquidity in

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Next, hedging helps in increasing the liquidity in financial markets like the stock market, commodity markets and derivative markets (Vinish, P., 2016). There are many market participants in these markets and they may easily buy or sell the asset. Thus they can reduce the loss they may face when the price movements are out of expectation. For example futures market is a liquid and central market because the high volume and turnover of futures contracts allows traders to enter and exit the market quickly and easily. In addition, hedging provides considerable price protection since banks and other financial institutions are more likely to finance producers, exporters and traders who hedge their crops and positions than those who do not. One of the disadvantages of hedging is it is associated with cost, it is not done for free, so in the case of derivatives there is premium and brokerage fees (Vinish, P., 2016). Therefore many people do not like to do hedging as they consider hedging expenses as unnecessary. Sometimes thing turns another side, if an investor wants availing the services of a professional hedger, he has to sacrifice some earnings. The investor need not pay fees to the hedger in advance, but a portion of the earnings would consider as commission charges. Thus it limits the profit of investor. The commission percentage is agreed upon before the commencement of the hedging agreement. Individual investors who discover slight movements in their investment portfolio should not do for hedging services, as hedging does not provide substantial benefits for small movements in the asset prices. Other than that, most registered investments are fully protected by federal and state law, but hedge funds not. Most hedge funds are not required to, and do not, disclose complete exposure potential to the Securities and Exchange Commission (SEC). The SEC has the authority to investigate the background of a hedge fund manager and it is not a requirement. If a fraud is perpetrated, the SEC will investigate civil and department issues, but the hedge funds are not guaranteed or protected like bank deposits and other 10
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UBFF3063 Financial Derivatives (Jan 2017) investment instruments (Brian, C., n.d.). Another disadvantages of hedging is that not all risks can be hedged and all the risks cannot be covered fully so in financial markets there are not all asset class have the corresponding hedge such as an exposure to general business risk and interest rate risk or prepayment risk of a held-to-maturity investment cannot be an hedged item because it cannot be reliably measured (Pricewaterhousecoopers, 2005). 11
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