Hedging is a protective tool to safeguard the value of one’s investment. Hedging helps in limiting the loss one may on his investment within tolerable limits. A put hedge gives the investor the rights to sell his securities at a pre-determined rate in lieu of a premium. It must be noted that when an investor buys a put hedge, he is not bound to sell the securities and so the purpose of buying a put hedge is to protect the value of one’s investment or limit the losses on that investment. The right is generally exercised if the value of the securities fall considerably and the investor is doubtful that the price will improve much in the near future.
One may feel that the put hedge option is generally availed by risk-averse investors , but this is not always true. Even people with high risk appetite avail put hedge so that they can increase their exposure and invest their money in other products as they have limited the amount of loss they may incur in the investments for which they have bought a put hedge.
Some people even hedge their call options with hedge options and try to capitalise on the difference in premium in both the transactions. It also enables the investor to meet his future repayment obligations, if any.
So what is a hedge fund manager? What is their role in all of the hedge fund dealings… is it like a specialised accountant? It must be hard to administer hedge by yourself if you have no qualifications… it’d be nice to know how to manage these with the help of a manager and how much it would cost.