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51

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 widgets till I've supplied all I'm supposed to. So far so good but I'm not located in the US and I need to pay my workforce in some other local currency. What ...


39

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. You may not be able to fully control the cost of toothpaste, but you can set an overall budget that includes some discretionary items, and adjust if prices ...


31

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 for $50.70 and I have the potential to make any amount that KO rises and lose any amount that KO drops. I buy 50 shares for $50.70 and I have the same risk/...


24

Hedging - You have an investment and are worried that the price might drop in the near future. You don't want to sell as this will realise a capital gain for which you may have to pay capital gains tax. So instead you make an investment in another instrument (sometimes called insurance) to offset falls in your investment. An example may be that you own ...


22

To avoid risk from rising interest rates, get a fixed rate mortgage. For the life of the mortgage your principal and interest payments will remain the same. Keep in mind that the taxes and insurance portion of your monthly payment may still go up. Because you own the property, the costs to maintain the property are your responsibility. If you rented this ...


20

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 insurance. Firms produce and use physical commodities, so they often need futures contracts to protect from adverse price fluctuations. These activities have ...


16

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 - less to lose, but also less to gain.


11

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 this 'using the financial markets', but if your goal is actual just 'a stable cost of living' as you say, then this can help with that. Of course, it adds on ...


10

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 used to reduce the risk of something going badly wrong when making a speculative investment. Suppose you are about to short a stock. You think it's going to go ...


10

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 lotteries available to you. The first is to purchase 120 shares of ABC at 100 per share for $12,000 (or pounds or euros or whatever). The second is to ...


9

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 a put and selling a call (with the same strike price and expiry date) Yes, and you can choose any strike (it doesn't have to equal the current stock price). ...


9

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 returns through LEAP Call options Utility costs can be hedged by exposure to natural gas futures and call options on utility companies. Gas can be hedged using an oil ...


8

Shorting penny stocks is very risky. For example, read this investopedia article, which explains some of the problems. In general: Illiquidity. Illiquidity from a small number of buyers/sellers means that you will have a hard time covering your short position, particularly if it's going the wrong way. Difficulty with the transaction. You won't ...


8

Sometimes you may want to be in a position long term but are worried about short term volatility and the price going against you in that period. You don't want to sell and re-buy back later as this may trigger a capital gain. Plus you don't know the extent of the price drop or when it will start recovering, so an alternative is to hedge against any potential ...


8

How can one offset exposure created by real-estate purchase? provides a similar discussion. Even if such a product were available in the precise increments you need, the pricing would make it a loser for you. "There's no free lunch" in this case, and the cost to insure against the downside would be disproportional to the true risk. Say you bought a $100K ...


8

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 intended investment. EDIT The purpose of the GBSE ETF is aimed for investors living in Europe wanting to invest in USD Gold and not be effected by movements in the ...


8

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 those that make alcoholic beverages? Why? For the same reason that you don't "buy vegan companies and short companies that were found to be engaged in animal ...


8

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 might never need insurance. Plenty of people still get insurance, because the risk you're insuring against would be devastating, and the low probability makes ...


7

The difference is in the interrelation between the varied investments you make. Hedging is about specifically offsetting a possible loss in an investment by making another related investment that will increase in value for the same reasons that the original investment would lose value. Gold, for instance, is often regarded as the ultimate hedge. Its value ...


7

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 the details of how it invests to figure out if that really matches up with what you want - there'll always be various trade-offs the fund manager has to make. ...


6

You can employ a hedging strategy using short selling, put options, or other methods that will partially neutralize your exposure to the overall market. e.g. You could short sell a market-wide index such as the S&P500, while going long (buying) the company you are interested in. Investopedia has a nice primer on this: A Beginner's Guide To Hedging ...


6

Note: I am making a USA-assumption here; keep in mind this answer doesn't necessarily apply to all countries (or even states in the USA). You asked two questions: I'm looking to buy a property. I do not want to take a risk on this property. Its sole purpose is to provide me with a place to live. How would I go about hedging against increasing ...


6

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, means a 10X return if the index drops to $10. A 70X return for a mild, cyclic, drop isn't likely to happen. Sharing youtube links is an awful way to ask a ...


6

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, resulting in 45.5k EUR . If the USD strengthens by 1%, this moves to a rate of ~1.09, resulting in 46k EUR value for the same 50k of USD investments. From this you ...


6

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 depreciates relative to the Euro between now and the time that you plan to cash out your investments. Not all stocks, though, have a high correlation relative to the ...


6

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 potential profit is worth the large potential loss. At the other end you have safe investments like bonds with an almost guaranteed return. Across the ...


5

In this type of strategy profit is made when the shares go down as your main position is the short trade of the common stock. The convertible instruments will tend to move in about the same direction as the underlying (what it can be converted to) but less violently as they are traded less (lower volatility and lower volume in the market on both sides), ...


5

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 are hedging. In layman's terms there must be an expectation that if Bitcoin rises then Ripple will fall and vice-versa. This is so that the loss from one is ...


5

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. the concept is totally irrelevant to your situation. To "eliminate the risk", trivially sell to Dollars or Euros. One click.


5

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 index. GSPX sits within the iShares 'Core' range and utilises a more modern/efficient share class structure. As GSPX utilises a share class structure, BlackRock is ...


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