Question

Explain the differences between a macro hedge and a micro hedge. Which type is more realistic for most institutions? Why?

Answer 1

The macro hedge is used to mitigate the risk associated with macroeconomic environments or the forces that are not in direct control of an organization but the organizations are greatly affected by it. The organizations can make hedging strategies which helps them to eliminate or reduce such external risks by using the macro hedge techniques like derivatives.

The micro hedge is used to mitigate the risk generally associated with single asset to offset its downward risk. That can be done by taking short positions in futures contracts of that same asset.

Macro hedging is more realistic for most institutions because it serves the broader purpose and hedges the entire investment rather than a single asset. The institutions can secure their exposures in the market to a great extent by using macro hedging techniques.