What are the Hedge margin and its benefits in the Basket order?

The term “Hedge” in the derivatives trades means, a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset. Hedging strategies typically involve derivatives, such as options and futures contracts.

Advantages of hedging the derivative contracts

• It limits losses to a great extent and can lock the profit
• It offers a flexible price mechanism as it requires a lower margin outlay, very low margin for hedging the positions.
• It protects the trader against the commodity price changes, inflation, currency exchange rate changes, interest rate changes, etc. on successful hedging
• In hedging option, provides traders an opportunity to practice complex options trading strategies to maximize return

Illustration

Trader A wants to hedge his position that is, buying the Nifty August expiry contract and hedge with the next month’s contract by selling the Nifty September expiry contract.  The total margin required is – 216369.54/- But because the position is being hedged, the trader gets the margin benefit of 89751/- and have to pay only the margin of 126618.54/-