Based in Luxembourg, Firminy Capital Sarl protects its securitized investments by establishing hedge funds to reduce risk. (Securitized funds are financial assets, such as mortgages, combined into one fund that investors can buy.)
In ways, a hedge fund is like insurance. Just as insurance protects policyholders from a partial or complete loss of a home or automobile, a hedge fund reduces the negative consequences in a particular stock or fund if prices fall.
Hedging is more complicated than insurance; losses in one product are offset by another kind of holding. For example, if a stock price falls below a specified level, options or futures are activated to make up for the loss, enabling investors to sell at that predetermined value and reduce risk.
Another example of hedging involves fluctuations in a commodity’s price. A company whose profits are affected by corn can set up a futures option. To protect itself against sudden changes in the price of corn, the company can commit to buying it at a certain price on a specific date. If the price goes higher than the futures option price, the company saves money. However, if the price drops below the option, the company must still pay the higher price, reducing profits.
In ways, a hedge fund is like insurance. Just as insurance protects policyholders from a partial or complete loss of a home or automobile, a hedge fund reduces the negative consequences in a particular stock or fund if prices fall.
Hedging is more complicated than insurance; losses in one product are offset by another kind of holding. For example, if a stock price falls below a specified level, options or futures are activated to make up for the loss, enabling investors to sell at that predetermined value and reduce risk.
Another example of hedging involves fluctuations in a commodity’s price. A company whose profits are affected by corn can set up a futures option. To protect itself against sudden changes in the price of corn, the company can commit to buying it at a certain price on a specific date. If the price goes higher than the futures option price, the company saves money. However, if the price drops below the option, the company must still pay the higher price, reducing profits.