Posted in Finance, Accounting and Economics Terms, Total Reads: 606
Definition: Anticipatory Hedge
An investor, who enters the market and wants to reduce the risks, may lock an asset for certain price before actually a transaction occurs. Typically it involves taking a long position, but could also be small. This is Anticipatory Hedge.
Thus it protects the investor from unfavourable movement in the price of an asset.
• Long Anticipatory Hedge - This is appropriate option when the trader is sure he will purchase the asset in future and wants to lock the price.
• Short Anticipatory hedge - This is appropriate option when the trader is sure he will sell the asset in future and wants to lock the price.
For example: someone exports wheat from India to The United States. On successful delivery he will be paid in dollars but it will take a lot of time in shipping. During this time, the farmer fears that there is a possibility that dollar price reduces as compared to Rupees. In such a situation, he may take a short call on dollar and hedge the anticipated decline. Its an anticipatory hedge as the farmer is calling a hedge strategy on a commodity, here dollar, which he does not possess yet.
In anticipatory hedging, the trader may execute a partial or complete hedge prior to the actual transaction. This reduces the risk by shifting market impact to participant involved in security.