Risk prevention techniques
Hedging is a strategy used to minimize risk by taking an offsetting position in a related asset. It aims to protect against adverse price movements.
1. Direct risk prevention:
- There is an opposite position in the same property. For example, if you have a long position in Bitcoin, you can hold a short position to hedge against potential losses.
2. Hedging cross-asset risks:
- Hedging a position by buying a position in a different but correlated asset. For example, if you buy technology stocks, you can hedge your risk by taking a position in a technology ETF or index.
3. Option insurance:
- Use options contracts (put and call) to hedge positions. Buying put options can protect against a decline in the asset's price, while buying call options can protect against missing out on price increases.
4. Futures and forward contracts:
- Use futures or forward contracts to lock in prices and prevent price fluctuations. For example, a Bitcoin miner can use futures contracts to lock in the Bitcoin selling price.
5. Hedging risks with CFDs (Contracts for Difference):
- Use CFDs to hedge against price fluctuations without owning the underlying asset. CFDs allow for short positions, which can be used to hedge long positions in the same or related assets.
