Hedging FAQ

1. What is “Hedging”?

Hedging is a risk management strategy used to reduce the impact of price fluctuations in financial markets. It involves taking an offsetting position in a financial instrument that is negatively correlated with the original position, so as to reduce the potential losses from market volatility. The goal of hedging is to minimize the impact of market risk on an investment portfolio, ensuring that any adverse price movements in one product are partially or fully offset by gains in the other.

​

2. As a physical gold trader, how do you do hedging using a trading account from Gold Fun?

​

Physical gold traders can use trading accounts to hedge their exposure to the price of gold by taking offsetting positions in gold contracts.

​

• For those who bought gold and are waiting for delivery:

If a trader is long physical gold and is concerned about a potential price decrease, they can sell gold contracts to lock in a selling price for their physical holdings. If the price of gold does in fact decrease, the loss on their physical gold holdings will be offset by the gain on their contract positions.

 

• For those who sold products and need to buy gold later as raw material:

If a trader is short physical gold and is concerned about a potential price increase, they can buy gold contracts to limit their potential losses. The use of trading accounts for hedging can help traders manage their risk and lock in profits. 

​

3. What is the best time to hedge and what is the best time to liquidate my hedging positions?

 

Hedging is typically used to manage risk, so the decision to hedge should be based on an assessment of the market environment and the investor's perception of future price movements, but typically, it should be done once a client is exposed to risks of price movements.

 

As for liquidating hedging positions, the best time to do so would be when the original position no longer requires protection from market risk, or when market conditions have changed such that the hedge is no longer necessary or is no longer effective in managing risk.

 

The use of stop-loss orders or other risk management strategies may also be appropriate to help manage risk and ensure a timely exit from a hedge, but we advise clients to liquidate their hedging positions when their original physical positions have also been cleared.