Finance coverage definition with Advantages and Disadvantages and Examples

Financial coverage

The definition of finance coverage of the company is a strategy widely used by investors, with the intention of making sure they avoid risks during low investment positions and for this they implement other types of operations that offset the possibility of losses.

If the strategy is done correctly, the operational and financial benefits of hedging can be extended beyond avoiding financial problems. In the same way, it allows other options that help the investor to maintain the value and increase it in the future.

Otherwise, if the financial analysis coverage is performed incorrectly , the benefits obtained from the offsetting asset are insufficient to justify the value.

Advantages of financial coverage

The financial coverage generates various advantages such as:

  • Preserves profits by allowing a futures contract and helps reduce losses.
  • Investors can save time in the long term by renewing coverage or allowing their time to expire, this avoids wasted time by having to follow up or adjust regardless of the condition of the market.
  • When the hedging strategy is properly executed, it can protect traders from unfavorable changes, such as changes in interest rates, changes in exchange rates or inflation, among others.

Disadvantages of financial hedging

The financial coverage , also has some disadvantages such as:

  • Hedging can become a problem for traders, as short-term trading can be difficult when constantly monitoring the market.
  • Mostly this strategy requires experience and skills to hedge investments, so it could require precision in calculations and complex trade-offs, which can be a challenge for new investors and traders.
  • The gains obtained may be limited, this is because the constant decrease in risk allows the gains to also decrease.

Examples of financial coverage

  1. The financial coverage is a method with the ability to avoid risks in an investment that has opposite position through an asset or financial derivative.
  2. The use of the financial hedging strategy is generated within the securities markets and may previously hedge the risks of investments in assets traded in the markets.
  3. Financial hedging is carried out in order to avoid contrary movements in the price of the asset, therefore, it is like insurance against losses and in favor of profits.

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