Anticipatory Hedging

Define Proactive hedging’

Early hedging describes a futures position was taken in advance in the future buy or sell transaction. From the point of view of stock trading in advance of hedge is used when an investor intends to enter the market and wants to reduce the risk by taking a long or short position in the target security. Such hedges usually means a long position, but may also include short positions for the subsequent sale is considered. Anticipatory hedging is typically used in order to lock-in price or to protect a certain amount of purchases from price fluctuations. Anticipatory hedges are used by investors to control entry to the market using futures, but they are more usually associated with business, using futures to control costs.

Breaking down the ‘Anticipatory hedge’

 

Anticipatory hedging is a useful tool for companies to lock in their cost. Often enterprises start production and demand forecasts to estimate materials, they must match their production with expected demand. Using these indicators, you can choose to hedge some or all of the other expected through proactive hedging. For example, the oil company expects the seasonal surge in gas demand in the summer tourist season and the increase in oil demand for heating in winter may introduce anticipatory hedging to cover the amount of the predictable jumps and lock-in the current price of oil. These proactive, long hedging is used by businesses when they expect costs to rise. Sellers of goods can also use a short anticipatory hedge to protect themselves from risks in time between extraction or growing a product and actually sell it.

Proactive hedging of exchange rate fluctuations

Anticipatory hedging is also used directly against the currencies in the implementation of the goods takes place across borders. For example, a farmer, wheat exports from the United States to England will be paid in pounds when the goods reach the final destination. Unfortunately, a global organization can still require a delivery time of several weeks, so that real exchange rate risk when the goods have to be paid on delivery. If the farmer fears that the pound will depreciate this period of time when compared to the dollar, it may take a short position on the pound, so that it can hedge the anticipated decline.

Proactive hedging and position limits

Anticipatory hedging is often defined as the proper functioning of the futures market. In principle, the person or entity hedging is used for protection needs for the commodity being hedged. This is in contrast to speculative hedging, when an investor takes a position based on a view of market price changes without prior actual share in the final use of the product. Because of speculative hedging often exceeds pre-emptive hedging by a large margin, market regulators periodically to restrict the installation to maintain the basic functions of the futures market, based on the real commodity markets. When these limitations are discussed, anticipatory hedging is often covered beyond the proposed position that the company can provide protection for some or all of their influence pricing.

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