Open an Account
Trade Now
  • Markets
  • Products
  • Research
  • Partner with us
  • Blog
  • Refer A Friend
Open an Account
Trade Now
  • Markets
  • Products
  • Research
  • Partner with us
  • Blog
  • Refer A Friend
Home » Blog » Derivatives Trading » Understand Power of Hedging in Futures Market
Religare Broking by Religare Broking
April 17, 2024
in Derivatives Trading
0

Understand Power of Hedging in Futures Market

What are the Advantages
  • Last Updated: Apr 17,2024 |
  • Religare Broking

In financial trading, hedging serves as a lifeline for many market participants. Hedging in the futures market is a vital risk management tool that allows investors, producers, and traders to mitigate potential losses by taking opposite positions to their primary investments. This post discusses hedging, aiming to explain its mechanism and highlight its significance in a volatile market landscape.

    Topics Covered:

  • What is Hedging in the Futures Market?
  • How to Hedge using Futures Contract?
  • Who Uses Hedging in the Futures Market?
  • Risks
  • Conclusion

What is Hedging in the Futures Market?

At its core, hedging using futures is a strategy used across financial markets to reduce the potential risk of loss from price fluctuations. As a significant player in this domain, the futures market is a key arena for hedging activities. Here, hedging involves trading futures contracts to offset the risks of adverse price movements in the market.

The goal of hedging is to lock in future prices, which could be for various assets, including commodities, stocks, currencies, and interest rates. This process empowers businesses, investors, and traders to plan, budget, and manage their resources with certainty, backed by contracts that guarantee prices and reduce volatility.

How to Hedge using Futures Contract?

1. Identify the Risk

The first step in implementing effective hedges is carefully identifying and assessing the risks involved. For instance, a wheat farmer must consider the potential risk of a future price drop, which could significantly impact their profitability.

2. Selecting a Future

Once the risks are identified, the next crucial step is selecting an appropriate futures contract that aligns with the farmer's needs. In the case of our wheat farmer, they would choose a wheat futures contract that corresponds to the same volume as their crop. This ensures that the hedge is accurately tailored to their circumstances.

3. Offsetting Position

After selecting the futures contract, the producer takes an opposing position in the futures market. They would go long by buying wheat futures to protect against potential price increases. On the other hand, if they intend to hedge against price decreases, they would go short by selling wheat futures. This offsetting position helps mitigate the potential losses caused by adverse price movements.

4. Monitoring and Adjusting

Remember that markets are constantly evolving. Therefore, regular monitoring and adjustments to the hedge are necessary to ensure its effectiveness in aligning with the changing market conditions. By staying vigilant and proactive in assessing the market trends, the wheat farmer can make timely adjustments to their hedge, thus maximising its protective potential.

Additionally Read: Demat Account Meaning

Who Uses Hedging in the Futures Market?

1. Consumers

Companies that heavily rely on raw materials, such as food manufacturers and energy providers, often employ futures contracts as a means of price protection. By entering into these contracts, they can hedge against potential price increases in raw materials, which can significantly impact their production costs. This allows them to plan their budgets more effectively and maintain stability in their operations.

2. Investors and Traders

Institutional investors and individual traders also utilise futures contracts for various purposes. Some use futures contracts as a hedging strategy to mitigate the risk associated with their investments directly in the market. For instance, an investor holding a portfolio of stocks may decide to enter into futures contracts to protect against potential market downturns. On the other hand, some investors and traders engage in futures contracts purely for speculative purposes, aiming to profit from price movements in financial instruments or commodities without owning the underlying assets.

Risks

While hedging can be a valuable tool, it comes with its own set of risks:

1. Basis Risk

Basis risk refers to the possibility that the hedge and the underlying asset do not move in perfect inverse correlation. This means that even though a hedging position is taken to offset the risk of the asset, there may still be some residual risk due to the imperfect relationship between the two.

2. Counterparty Risk

Counterparty risk is the risk associated with the other party not fulfilling their obligations in a futures contract. This risk arises when the counterparty fails to deliver the underlying asset or make the required payment at the agreed-upon contract expiration.

3. Liquidity Risk

Liquidity risk pertains to the potential difficulty of exiting a hedging position when needed. It refers to the risk of not being able to find a buyer or seller in the market to execute the desired trade, potentially resulting in unfavourable prices or even the inability to exit the position at all.

So, understanding these risks and the potential rewards is crucial for anyone considering implementing a hedge.

Conclusion

Hedging in the futures market involves mitigating risk by offsetting potential losses with opposite positions. Enhance your hedging strategies by utilizing the features of an online demat account, facilitating efficient execution and management of hedging positions to protect your portfolio.

However, be aware of the risks and ensure the hedge meets market conditions. Mastering hedging can be a powerful tool in a trader's or investor's arsenal, imparting a sense of stability and certainty in an ever-fluctuating market ecosystem.

You may also like

What is Hedging in Stock Market

Hedging and Speculation

Transform Your Investment Strategy with Religare Broking

Open Derivative Trading Account
Religare Broking

Religare Broking

Religare Broking: Online Trading of Stocks, Commodities and Mutual Funds in India

Related Posts

Option Trading Strategies for Experienced Traders in 2025
Derivatives Trading

Option Trading Strategies for Experienced Traders in 2025

May 16,2025

Risk Management Strategies for Futures Traders
Derivatives Trading

Risk Management Strategies for Futures Traders

May 05,2025

Importance of Margin in Futures Trading
Derivatives Trading

The Importance of Margin in Futures Trading

May 05,2025

What is Call Writing
Derivatives Trading

What Is Call Writing?

May 05,2025

How to use Stocks for Hedging your Stock Portfolio
Derivatives Trading

How to Use Options for Hedging Your Stock Portfolio

May 05,2025

Covered Calls Vs Protective Puts
Derivatives Trading

Covered Calls vs. Protective Puts: A Risk-Reward Analysis

May 05,2025

Disclaimer:This blog is written exclusively for educational purpose. Any stock mentions in the blog are examples and not recommendations. Please refer to our research reports or analyst recommendations for stock ideas.

No Result
View All Result

Open a Free Demat & Trading Account

Please enter valid name
Please enter valid phone

Category

  • Income Tax (1)
  • Commodity Trading (16)
  • Saving Schemes (12)
  • Derivatives Trading (80)
  • Currency Trading (4)
  • TradingView (2)
  • Margin Trading (2)
  • National Pension Scheme (2)
  • Algo Trading (2)
  • Stock Market (166)
  • Online Share Trading (103)
  • Demat Account (38)
  • Mutual Funds (45)
  • IPO (26)
  • Indian Market & Economy (8)
  • Income Tax (15)
  • Uncategorized (1)

Latest Blogs

Top ETFs In India
Top Gold ETFs in India
Highest Dividend Yield Stocks In India
What Are the Best Swing Trading Strategies?
Option Trading Strategies for Experienced Traders in 2025
Top Risk Management Techniques for Active Traders
How to Select Stocks for Swing Trading
Scalping vs Day Trading: Which Strategy is Best for Fast Gains?
IPO GMP – Latest IPO Grey Market Premium
Stock Market for Beginners: Ten Great Ways to Learn Stock Trading
Learn More About Derivatives Trading


Markets

  • Stock Market Live
  • Derivatives
  • Commodities
  • Currency
  • Upcoming IPO
  • Listed IPO

Products

  • Overview
  • Equity
  • Derivatives
  • Commodities
  • Currency
  • Margin Trading Facility
  • IPO
  • IPO GMP

Services

  • Tin FC
  • NPS
  • DSC
  • Open Demat Account
  • Open Trading Account

Research

  • Investment Ideas
  • Trading Calls
  • Research Reports
  • Blog
  • Knowledge Centre
  • Stock Market Holidays
  • NSE Holidays
  • BSE Holidays

Support

  • Contact Us
  • Locate Us
  • Downloads
  • Margin Calculator
  • Margin Matrix
  • Feedback
  • Activation Key
  • Demat Account FAQs
  • Trading Account FAQs
  • About Us
  • Notification
  • Disclaimer
  • Privacy Policy
  • Terms Conditions
  • Rules Regulations
  • Corporate Information
  • Educational Note For Clients On PMLA
  • Partner with Us
Important Links
  • NSE
  • BSE
  • SEBI
  • MCX
  • NCDEX
  • MSEI
  • NSEL
  • IRRA
Investor Complaints
  • NSE
  • BSE
  • MCX
  • SEBI
  • SEBI SCORES
  • NCDEX
  • MSEI
  • SMARTODR
E-Voting Facility
  • NSDL
  • CDSL
Upcoming IPO
  • OYO IPO
  • Yatra Online IPO
  • Ixigo IPO

Unified Portal Version No.1.0.0.2

Copyright 2010 Religare. Trademarks are the property of their respective owners. All rights reserved. Religare Broking Limited (CIN: U65999DL2016PLC314319), Registered Office: 802-815B, 8th Floor, Gopal Das Bhawan, 28-Barakhamba Road, Connaught Place, New Delhi -110001
Telephone No.: +91-011-49871213 | Fax: +91-011-49871189
E-mail: wecare@religareonline.com

Member Religare Broking Limited (RBL) : SEBI Regn. No. INZ000174330 NSE CM, F&O, CD TM Code: 06537 Clearing Member (F&O) No. M50235; BSE CM, F&O, CD, CO Code: 3004 Clearing No: 3004; MSEI CM, F&O, CD, TM Code: 1051 | MCX Membership No. 56560 | NCDEX Membership No. 01276 | AMFI-registered Mutual Fund Distributor ARN No.139809.

Member Religare Commodities Limited (RCL) : Regn No. MCX 10575 | NCDEX 00109|NeML 10042|NSEL 10180 |SEBI Registration No. MCX/NCDEX :INZ000022334.

Depository Participant : Religare Broking Limited (RBL) - NSDL: DP ID: IN 301774 | SEBI Regn. No: IN-DP-385-2018 | CDSL DP ID: 30200 | SEBI Regn. No: IN-DP-385-2018

Religare Broking Limited(RBL) : Research Analyst SEBI Regi. No : INH100006977

Religare Broking Limited(RBL) : Registrars to an issue and share Transfer Agents (RTA) - SEBI Regi. No : INR000004361

Religare Broking Limited(RBL) : Corporate Agent (Composite) - IRDA Regi. No : CA0581

Religare Broking Limited(RBL) : National Pension System - Point of Presence (NPS-POP) - PFRDA Regi. No : POP01092018

Advisory for Investors

  • Investor Charter Stock Broker
  • Investor Charter Research Analyst
  • Investor Charter of Depository Participant
  • Advisory KYC Compliance
  • Investor Charter of Registrars to an issue and share Transfer Agents (RTA)
  • For Reporting of Cyber attack/incident Click here..!!
  • Details of Client Bank Accounts of Religare Broking Limited
  • How to Link Your Aadhaar Number with Demat Account
  • How to link Aadhaar Card with your PAN Card
  • How to Open a Demat & Trading Account Online
  • Member Details
  • SOP - Centralized mechanism for reporting the demise of an investor through KRAs
  • SEBI Investor Website
  • Quiz-NFL-Banner

ATTENTION INVESTOR

-- Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020.

-- Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.

-- 20% upfront margin of the transaction value to trade in cash market segment.

-- Investors may please refer to the Exchange's Frequently Asked Questions (FAQs) issued vide circular reference NSE/INSP/45191 dated July 31, 2020 and NSE/INSP/45534 dated August 31, 2020 and other guidelines issued from time to time in this regard.

-- Check your Securities /MF/ Bonds in the consolidated account statement issued by NSDL/CDSL every month.

-- Prevent unauthorized transactions in your account - Update your mobile numbers/email IDs with your stock brokers. Receive information of your transactions directly from Exchange on your mobile/email at the end of the day - Issued in the interest of Investors.

-- Prevent Unauthorized Transactions in your demat account Update your Mobile Number with your Depository Participant. Receive alerts on your Registered Mobile for all debit and other important transactions in your demat account directly from Depository (NSDL/CDSL) on the same day issued in the interest of investors.

--If you have any grievance you may reach Religare Broking Limited at igreligare@religare.com & Religare Commodities Limited at ig.commodities@religare.com.
If the complaint does not get redressed within 30 days, the complainant may use SCORES to submit the grievance.

--Filing complaint on SEBI SCORES – Easy & quick
a. Register on SCORES portal.
b. Mandatory details for filing complaints on SCORES - Name, PAN, Address, Mobile Number, E-mail ID.
c. Benefits - Effective Communication & speedy redressal of the grievances

-- No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investors account.

-- KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary.

-- Trading and Demat Accounts opened under Insta Plan will not be eligible for dealing through branches.

-- Please note that by submitting your mobile and email on our website, you are authorizing us to Call/SMS/Whtsapp/RCS/Email you even though you may be registered under DNC. We shall Call/SMS you for a period of 12 months.

No Result
View All Result
  • Products
  • Research
  • Career
  • Partner with us

© 2021 RELIGARE -Designed By Religare.

Open Demat Account
Please enter valid name
Please enter valid phone

Open a FREE Demat
& Trading Account

Invest in Stocks, IPOs, F&O &
Mutual Funds

Please enter valid name
Please enter valid phone
religare logo

Get better recommendations, Make better investments.

Daily Stock Suggestions from Leading Experts!

By signing up, you agree to receive updates on SMS, Email & WhatsApp