Capital Market Chronicles – Episode 158: Purpose of Derivatives Market – (II) RISK MANAGEMENT (HEDGING)

 Capital Market Chronicles – Episode 158: Purpose of Derivatives Market – (II) RISK MANAGEMENT (HEDGING)

If derivatives were superheroes, their capes wouldn’t be for wild speculation or fancy arbitrage tricks. Their real superpower is hedging — the boring-but-reliable power of protection. 🦸‍♂️

Think of hedging as the financial equivalent of:

• Wearing a helmet before riding a scooter 🛵,

• Carrying an umbrella during monsoon ☔,

• Or keeping backup snacks for when the biryani delivery runs late. 🍛

Most days, you don’t need them. But the day you do, you’re the smartest person in the room.

Example 1: Hedging with Futures

You hold Reliance shares at ₹2,000 and life looks good… until that voice in your head says:
“What if it drops to ₹1,800?” 😱

Solution? Sell Reliance futures at ₹2,300. If the price tanks, you still smile because you’ve already locked in profits.

In other words: while others are running around like contestants on Bigg Boss, you’re calmly watching the chaos with popcorn. 🍿

Example 2: Hedging with Options

Now suppose Reliance is at ₹1,800. You’re worried it’ll rocket upward but don’t want to commit fully. You buy a call option with a strike of ₹1,800.

• If it jumps to ₹2,000, you win big — champagne time. 🍾

• If it falls, you simply walk away, losing only the option premium (like cancelling that Goa trip and only losing the booking fee 🏖️).

It’s limited risk, unlimited upside — the kind of deal you wish Zomato offered on midnight snacks.

Why Businesses Love Hedging

• Airlines hedge fuel costs so they don’t faint at every oil price hike. ✈️

• Exporters hedge currencies so the dollar-rupee tango doesn’t ruin their profits. 💱

• Farmers hedge crop prices so monsoons or market swings don’t turn their harvest into heartbreak. 🌾

Basically, hedging is what allows businesses to plan ahead instead of reacting like headless chickens. 🐔

Why Investors Should Hedge

For individual investors, hedging isn’t about making you rich overnight. It’s about:

1. Price Protection – locking in profits and cushioning losses.

2. Loss Control – setting boundaries so one bad move doesn’t wipe you out.

3. Peace of Mind – sleeping well even when markets toss and turn like an insomniac. 😴

The Takeaway

Hedging may not sound glamorous, but it’s the reason businesses survive shocks and investors stay sane. Derivatives, when used as hedges, are less about “Vegas-style gambling” and more about “insurance against chaos.”

So remember: Speculators may grab the headlines, but hedgers keep the economy running smoothly — quietly, like Wi-Fi. 📶

📌 Next Episode: Ready for the thrill-seekers? In Episode 159, we’ll meet the speculators — the roller-coaster riders of Dalal Street. 🎢