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Risk can be divided into two types, namely systematic risk, and unsystematic risk. The former is a risk due to price movement and is market-related and it can be mitigated by hedging. Hedging is an effort to protect or minimize the potential loss resulting from adverse price movement when commitment in a cash market. It acts as insurance, to ascertain that the loss due to the price movement can be covered.
a) Explain why a trader has to hedge.
b) State TWO (2) significant elements when a hedger goes into a derivative market.
c) Explain TWO (2) advantages of hedging to a trader.
d) What is a short hedge? Who should adopt this short hedge strategy? Give an example.
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