Financial Derivatives and Gold: Choosing the Appropriate Risk Hedging Instrument under COVID-19 Crisis

Abstract

This essay delves into the strategic use of financial derivatives and gold as instruments for hedging against market volatility, with a specific focus on the energy and food sectors. By analyzing case studies of prominent entities like Sinopec, BP, Bunge, and the Russian Federation, the paper elucidates how these entities have leveraged futures, options, swaps, and gold to shield themselves from the perils posed by price fluctuations, exchange rate fluctuations, and geopolitical tensions. In this examination, the essay thoroughly assesses the merits and drawbacks of these hedging tools. Financial derivatives, it argues, offer an efficient means of short-term risk mitigation, particularly when dealing with anticipated fluctuations within a defined range. On the other hand, gold emerges as a robust choice for long-term hedging, providing a stable refuge against pervasive uncertainties. Furthermore, this essay extends valuable guidance to investors and managers, advocating for a tailored approach grounded in individual risk appetites and the prevailing market dynamics. It underscores the importance of choosing between financial derivatives and gold based on the specific requirements of their risk management strategies. This essay asserts that a judicious blend of financial derivatives and gold can protect against market volatility. It serves as a testament to the nuanced decision-making required in navigating the complex landscape of risk management in the energy and food sectors.