Sustainable Hedging: Risk Reduction Strategies

1. Give the Brief Introduction of sustainable development. 

Natural hedge sustainability development refers to the reduction in the risk factor that can develop from the normal operating procedures of an institution. Thus, an organization with a great number of sales in a particular country holds a hedge on the currency risk, especially if it produces expenses in that currency. For instance, a producer of oil situated in the United States that has their refining operations in the U.S. may be identified as naturally hedged when compared to the cost of dollar-denominated oil. Hence, even though a company can modify its operational behaviour to take full advantage of a natural hedge, these hedges are a lot less flexible when compared to financial hedges. Moreover, natural hedge sustainability may also be deemed as a management strategy that looks to mitigate any risks by investing in those assets whose performance may be negatively correlated.

2. When did the Natural Hedging sustainable development has been started and whom? 

Natural hedging was a concept that started when investors started seeking sustainable investing. However, in order to successfully invest there are a few strategies which can be utilized. Moreover, a natural hedge requires an investor to utilize asset classes in order to reduce a company’s risk overall. The reasoning behind this is by properly allocating resources to two separate asset classes, the risk that is produced from one asset is cancelled by the return that emanates from the other. This process may be viewed in reverse as well. Hence, the flow of cash from one investment should hold the capacity to cancel the cash flow from another. This goes on to properly fulfil the concept of a hedge.

3. What was the need of this sustainable development? 

In today’s modern times, hedging is considered to be extremely significant. Hedging may be defined as a ‘financial toll,’ a strategy that aids an investor to decipher and evade risks. The main need of this strategy is to reduce any losses that may arise from the fluctuation that the market undergoes. Thus, hedging ensures that the risk is significantly reduced. Thus, hedging is extremely important when one wants to secure their financial investments from the uncertainties of the market. This is because the fluctuation may cause huge losses to the investor. Moreover, hedging funds may also be considered an investment that is not only limited to the stock market. Hence, gold can be considered as a hedging fund that even tackles the problem of inflation. Thus is why gold is utilized to hedge against any stock market fluctuations.

4. What is the uses of these sustainable development? 

Since financial hedging is an extremely crucial strategy that minimizes the level risk that an investor faces, there are multiples uses of this strategy. Firstly, the strategy of financial hedging is utilized in order to reduce an investor’s overall risk. Investing a large amount of money in the market can be considered extremely risky because one stands the risk of losing the investment. By adopting this strategy and investing money across various platforms, a business is able to shield themselves from potential losses in their business. Secondly, sustainable hedging can be utilized to protect one’s business. Without the utilization of hedging, an individual is exposed to the negative fluctuations of the market. Hedging also ensures opportunities to earn a significant amount of profit.

5. What is the Criticism of sustainable development? 

Even though hedging proves to be an excellent financial strategy, it is not a perfect solution to guard a business against the ups and downs of the market. There are certain risks that are attacked with financial hedging as well. For instance, hedging involves many costs that can dilute the profit margin. Since risks and rewards are directly proportionate to each other, reducing any kind of risk would indicate to a reduction in profits as well. Moreover, for any short term trader, hedging becomes an extremely strenuous strategy to follow. Finally, if the market is performing well, then the strategy of hedging proves to be futile.

6. What is the related topic and concept of sustainable development? 

There are certain topics and concepts that are correlated to the concept of sustainable financial hedging. Firstly, the concept of macro-hedging is also related to this strategy. Macro-hedging refers to a particular investment technique that works to eliminate the downside systematic risk from a portfolio of different assets. The term ‘macro’ in macro hedging points towards the risk mitigation circling around macroeconomic events. Nonetheless, macro-hedging requires unlimited access to market trading platforms and additionally the ability to use numerous financial tools in order to structure sufficient positions in the market. Moreover, decoupling refers to a situation where the returns on two classes or even asset classes which normally move together can be seen to move separately. For example, the prices of oil and natural gas go hand in hand. The prices of stocks and corporate bonds are also seen to move together. Thus, these are the concepts that are directly related to the concept of sustainable financial hedging.