51
votes
Hedging vs just betting less
Let's say I win a contract to supply widgets. The contract is for $600K.
Unfortunately I need 6 months to make the widgets but I've negotiated and I'll get paid $100K every month as I manufacture the ...
- 5,095
39
votes
Can I hedge my household expenses using the financial markets?
You don't consume enough of any one good to make hedging with futures economical.
I'll present an alternate method - you hedge against risk in household expenses by setting a budget and sticking to it....
- 129k
31
votes
Hedging vs just betting less
There are many kinds of hedges and many different circumstances where one could employ them. Let's look at some random option scenarios for investing in Coca Cola (stock symbol KO):
I buy 100 shares ...
- 75.7k
20
votes
Hedging vs just betting less
In its pure form, hedging is used to mitigate an existing risk that is inherent to some substantive (not just financial) activity. People work to provide for their families, so they often need life ...
- 29.4k
16
votes
Hedging vs just betting less
In a nutshell, you typically would hedge only one direction of risk (the loss direction), leaving the gain direction open - you do want the gain.
Betting less would reduce both directions of risk - ...
- 37.5k
11
votes
Can I hedge my household expenses using the financial markets?
The largest personal cost you have is probably housing - and you can hedge the risk of real estate fluctuations without use of financial instruments. ie: you can buy your home. You might not consider ...
- 41.5k
10
votes
Hedging vs just betting less
Anybody can bet a smaller amount. You can reduce your risk to zero if you bet nothing. But then you'll gain nothing.
As other posters have said, there are many forms of hedging. Sometimes they are ...
- 9,717
10
votes
Hedging vs just betting less
No, reducing the amount you bet is not the same as hedging. If you think of contracts with uncertain payouts as lotteries, then hedges change the lottery you are playing.
Imagine you had two possible ...
- 4,267
9
votes
Accepted
How do I replicate a shorted stock and protective call option using options only?
Your replication is valid but unnecessarily complex (incurring extra trading costs). You only need a long put with a strike of $105.
short-selling a stock should be approximately equivalent to buying ...
- 29.4k
9
votes
Can I hedge my household expenses using the financial markets?
In theory (but not practical in reality), you could hedge each of those expenses with various inflation swaps, futures, and other OTC products.
Housing costs can be hedged by exposing to REITs ...
- 437
8
votes
Is a currency "hedged" ETF actually a more speculative instrument than an unhedged version?
Currency hedge means that you are somewhat protected from movements in currency as your investment is in gold not currency.
So this then becomes less speculative and concentrates more on your ...
- 21k
8
votes
Vegan hedge (shorting non-vegan, long vegan)
Sorry to sound snarky and harsh but this idea just isn't realistic.
Why not buy currencies of democratic countries and short those of repressive regimes? Or buy companies that make toys and short ...
- 75.7k
8
votes
Hedging vs just betting less
Think of it like insurance.
Insurance is inherently a loss making proposition - if an insurance company paid out more than it took in, it wouldn't exist.
If you're a careful driver and own a car, you ...
- 181
7
votes
Accepted
How to invest in a specific market without investing in a specific company?
You need to hope that a fund exists targeting the particular market segment you are interested in. For example, searching for "cloud computing ETF" throws up one result.
You'd then need to read all ...
- 27.6k
6
votes
Accepted
Unemployment Insurance Through Options
This is a snapshot of the Jan '17 puts for XBI, the biotech index.
The current price is $65.73. You can see that even the puts far out of the money are costly. The $40 put, if you get a fill at $3, ...
6
votes
Hedging against Exchange Rate Risk
You can calculate your exposure intuitively, by calculating your 'fx sensitivity'. Take your total USD assets, let's assume $50k. Convert to EUR at the current rate, let's assume 1 EUR : 1.1 USD, ...
- 41.5k
6
votes
Accepted
Hedging against Exchange Rate Risk
How can I calculate my currency risk exposure?
You own securities that are priced in dollars, so your currency risk is the amount (all else being equal) that your portfolio drops if the dollar ...
- 129k
6
votes
Accepted
Is crypto an uncorrelated (or negatively correlated to traditional markets) asset class?
Investing involves an evaluation of risk in return for an expected amount of reward.
At one end you have speculation where an investor takes on a large amount of risk with an expectation that the ...
- 75.7k
6
votes
Accepted
What is the difference between these 2 S&P500 tracking iShare ETFs?
I had the exact same question, and unsatisfied with the responses here I got in contact with iShares and this was their response:
IGUS is a legacy ETF, which as you correctly note, tracks a hedged ...
- 76
5
votes
Hedging cryptos (or money in general)
I don't think that you understand hedging properly; to hedge one instrument, no matter the security type, with another the hedging instrument must be negatively correlated with the instrument that you ...
- 8,630
5
votes
Hedge against crypto currency / exchange risk
The sort of "hedging" you have heard about on business TV simply doesn't apply to such bizarre/thin/unusual markets; and it only applies when large wholesale amounts of the item in question is in play....
- 13.7k
5
votes
Accepted
Gold and inflation
the inflation adjusted price is higher then the nominal, what is that about?
With inflation, prices get higher over time. So $50 in 1970 is the equivalent of, say, $500 today (I'm not using exact ...
- 129k
5
votes
How do I replicate a shorted stock and protective call option using options only?
There are 6 basic synthetic positions relating to combinations of put options, call options and their underlying stock in accordance to the synthetic triangle:
Synthetic Long Stock = Long Call + ...
- 75.7k
4
votes
How to hedge an adjustable rate mortgage to lock in the current rate for the whole loan duration?
Spreadsheets are your friend.
You don't offer the dollar amount, so I'll offer $100,000 and you can scale it up to your numbers.
$100,000 at 3% requires a payment of $421.60.
Instead, pay $477.42,...
4
votes
I am trying to start a "hedge fund," and by that, I really just mean I have a very specific and somewhat simple investment thesis that I want to
Kudos for wanting to start your own business. Now let's talk reality.
Unless you already have some kind of substantial track record of successful investing to show potential investors, what you want ...
- 10.1k
4
votes
Accepted
Confused about eurodollar futures
If they short the contract, that means, in 5 months, they will owe if the price goes up (receive if the price goes down) the difference between the price they sold the future at, and the 3-month ...
- 456
4
votes
Hedging against currency risk
In a word: "no". Essentially, the old adage:
You don't get something for nothing.
applies.
If there was a way of removing risk for free (i.e. without lowering returns), then that element of risk ...
- 9,096
4
votes
Vegan hedge (shorting non-vegan, long vegan)
I'm surprised at the extent to which some of these answers are making assumptions about OP's motivations in asking this question and that he/she must personally be vegan and want to use this "fund" as ...
- 199
4
votes
Can I hedge my household expenses using the financial markets?
If your costs are in US dollars, I-Bonds adjust yield and TIPS adjust principal periodically using the US government's CPI-U measure of consumer price inflation, including food and energy.
Whether the ...
- 8,289
4
votes
Accepted
Can a buy order be skipped when price rises rapidly?
If you place a limit order to buy and price gaps through your limit price, you will not get to buy additional shares.
If you place a conditional order that becomes a market order if a certain price is ...
- 75.7k
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