Recently, the Securities and Exchange Board of India (SEBI) has asked local hedge funds to declare their futures and option (F&O) trades and the underlying stocks on which such equity derivative posi
About Futures and Option (F&O) Contract:
- Futures Contract: It is an agreement between buyer and seller to buy or sell an asset at a certain time in the future at a certain price.
- The buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
- Underlying assets include physical commodities and financial instruments (stocks, currencies and bonds etc.)
- They are subjected to high risk and can reap unlimited profit or loss.
- Option Contract: An option is a contract that gives an investor the right but not the obligation to buy or sell a commodity at a specified price at a specified future date.
- They carry limited risk and can reap either unlimited profit or loss.
- Advance is paid in the form of premiums in option contracts.
Q1:What is hedging?
Hedging is an advanced risk management strategy that involves buying or selling an investment to potentially help reduce the risk of loss of an existing position.