What is Hedge and How to Do it ?

13Jan, 2023

Happy New Year to all of you ,2022 had been tumultuous ,lets hope for a better 2023 .

In this article we will discuss What is Hedging and How to do it .

In the stock market, hedging is a way to get portfolio protection—and protection is often just as important as portfolio appreciation.

Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset.

The reduction in risk provided by hedging also typically results in a reduction in potential profits.

The best way to understand hedging is to think of it as a form of insurance. When people decide to hedge, they are insuring themselves against a negative event’s impact on their finances. This doesn’t prevent all negative events from happening. However, if a negative event does happen and you’re properly hedged, the impact of the event is reduced.

Hedging strategies typically involve derivatives, such as options and futures contracts.

Suppose you own shares of MRF. Although you believe in the company for the long run, you are worried about some short-term losses in the tyre industry. To protect yourself from a fall in MRF, you can buy a put option on the company, which gives you the right to sell MRF at a specific price (also called the strike price). If your stock price tumbles below the strike price, these losses will be offset by gains in the put option.

In case if you want to hedge your entire portfolio of stocks you can do it by buying put option of Nifty 50 .

You can decide the value of hedge by assessing the beta of your portfolio with respect to nifty .

Below is the Calculator for it .

This is a C program that calculates the potential return on investment (ROI) for a portfolio over a specified number of months. The user inputs their initial capital, the number of months for which to calculate the ROI, the beta of the portfolio, the absolute return of the market for that period, and the value of the hedge they are buying each month. The program then prompts the user to input the market return for each month and calculates the potential ROI for each month with and without hedging. The final output is the absolute return of the portfolio with hedging.

#include<stdio.h>

int main()
{
    int i,j,k;
    float a,c, b, f, e, h, g, l,retn[100];
    printf("Enter Your Capital in Rupees :\n");
    scanf("%f", &c);
    printf("How many month's data you want to backtest?\n");
    scanf("%d", &k);
    printf("what is the beta of your portfolio?\n");
    scanf("%f", &b);
    printf("How much absolute return the market gave in that period?\n");
    scanf("%f", &a);
    printf("Enter value of Hedge you are buying each month :\n");
    scanf("%f", &h);

    for (i = 1; i <= k; i++)
    {
        printf("Enter return of market in Month No %d\n", i);
        scanf("%f", &retn[i]);
    }

    f = c + (c * 0.01 * b * a);
    printf("After %d month without hedging your capital will be %0.2f Rs\n", k, f);
    e = c;
    for (i = 1; i <= k; i++)
    {

        if (retn[i] >= 0)
        {
            l = e + (e * 0.01 * b * retn[i]);
        }
        else
        {
            l = e + (e * 0.01 * b * retn[i]) - (h * 0.01*retn[i]);
        }
        printf("After %d Month Your Capital Will be %0.2f Rs \n", i, l);
        e = l;
    }
    g = ((l - c) / c) * 100;
    printf("With Hedging Your Absolute return becomes %0.2f Percent", g);
    return 0;
}

You can copy and run the program at OnlineGdb / OnlineIDE

Here is a sample Output