Hedging and Derivatives (1 Viewer)

[magik22]

Hey I'm just curious about the difference between hedging and derivatives.

At first I thought they were the same.

This is my thought: Derivatives is a form of hedging so its safer during global transactions against fluctuating currencies.

 

[magik22]

bump.

Any ideas from anyone?

thx.

 

[Captain Hero]

Wikipedia

 

[SureBluff]

not sure if you need to know that in any details in the economics course but it is usually covered in finance course in uni. basically hedging is investment in the security of another investment to minimize risk while derivatives is a collective name given to other financial instruments such as options, futures, swaps etc ... note, I did not do economics in highschool, I took it up in uni so don't blame me if you actually need to know it (but I doubt it)

 

[SureBluff]

omg, Captain Hero, you're such a maverick. hehehe oh and btw, I should mention, NEVER USE WIKIPEDIA in your assignments ... EVER.

 

[Captain Hero]

omg, Captain Hero, you're such a maverick. hehehe oh and btw, I should mention, NEVER USE WIKIPEDIA in your assignments ... EVER.

Never directly reference it, you mean. Use it as a starting point for anything you don't understand and follow the references in the article, if there are any.

 

[Clever Chick]

U need to know this for business studies

but i still dont understand it!

 

[SureBluff]

*goes to edit the wikipedia article to say hedging and derivatives are the same thing* mwahahah :evilgrin:

 

[Captain Hero]

All I know is that derivatives get more awesome the more hardcore you leverage them.

We're talking 250:1 leverage here. Some seriously cool shit

 

[toddybburgess]

hedging is protecting against against future currency fluctuations
and derivatives are protecting against future changes in the price of an asset


i think

 

[leoyh]

^ sort of. hedging is basically to minimise your risk, and that could be as a result of currency fluctations or price changes for a variety of reasons.

in short, hedging is to minimise your risk when you invest and derivatives is the instrument that allows you to hedge, for example future contracts

pretty sure you don't need this for HSC eco though

 

[gnrlies]

all hedging means is to minimise risk. in a financial context this is usually done by garunteeing the price, or supply for a fee. but more generally it could be used in other ways, for example you might hedge yourself against the risk of falling over by wearing a sturdy pair of shoes. But as you can imagine the last example is irrelevant in economics so usually it is just limited to the former examles (obtained through derivatives usually). It is not limited to currency fluctuations.

Derivatives literally means an asset 'derived' (or determined) from the value of another. Think of it like a piece of paper that says "by owning this piece of paper you also own 100 tonnes of ......." where it could be anything from currency, to wheat to mortgage backed securities. There are different types as mentioned (options, futures etc) that vary in the way in which they function but you wont need to know these in HSC economics. The benefit of them is that they can garuntee future supply and the price. For example a derivative can be written so that it provides stock at a certain date in the future (this is called a future). This allows firms to have certainty so that they know what their expenses will be. Derivatives can also be traded on secondary markets which provides greater flexibility.