Agreed.
what is hedging?
- Thread starter yana hansen
- Start date
Well Hedging can mean many things.
For a market maker or a Bank dealer, it means to reduce or neutralize his overall exposure to a particular security or to a basket of securities (Or even to his Options book).
For example, a market maker (Who is making market in let's say TSLA stock) has a cap to his long or short exposure to TSLA, let's say he is not allowed to hold more than $50m worth of Long or Short Tesla on a given day. If he goes above that limit, then he must either sell some of his TSLA shares in order to reduce his exposure or hedge what's above the $50m using some other instrument (Usually a derivative or a highly correlated stock or ETF if allowed).
For a fund manager, it means to buy some insurance to protect their portfolio holdings (Usually against declines) because the future is uncertain (Politically, economically or for anything else).
For a Commodities producer/user, it means to lock in their production/needs (Fix the price at which they will either buy or sell the commodity in the future) to neutralize future price risks.
So from a generic perspective, hedging is actually transferring some type of risk to some other counter party.
As talked within the Forex retail world, hedging is usually referred to having both long and short positions in the same currency pair. This is not truly hedging, this is just locking on (Or freezing) a position open P/L.
There is a big fiasco in FX retail trading that you don't need to take a loss (i.e. realize a loss of a position), you instead hedge it and open an opposite trade, this is just non sense.
For a market maker or a Bank dealer, it means to reduce or neutralize his overall exposure to a particular security or to a basket of securities (Or even to his Options book).
For example, a market maker (Who is making market in let's say TSLA stock) has a cap to his long or short exposure to TSLA, let's say he is not allowed to hold more than $50m worth of Long or Short Tesla on a given day. If he goes above that limit, then he must either sell some of his TSLA shares in order to reduce his exposure or hedge what's above the $50m using some other instrument (Usually a derivative or a highly correlated stock or ETF if allowed).
For a fund manager, it means to buy some insurance to protect their portfolio holdings (Usually against declines) because the future is uncertain (Politically, economically or for anything else).
For a Commodities producer/user, it means to lock in their production/needs (Fix the price at which they will either buy or sell the commodity in the future) to neutralize future price risks.
So from a generic perspective, hedging is actually transferring some type of risk to some other counter party.
As talked within the Forex retail world, hedging is usually referred to having both long and short positions in the same currency pair. This is not truly hedging, this is just locking on (Or freezing) a position open P/L.
There is a big fiasco in FX retail trading that you don't need to take a loss (i.e. realize a loss of a position), you instead hedge it and open an opposite trade, this is just non sense.
Absolutely not or else it would be called insurance and be regulated and so many other things.
Once the stock market crashed the index futures crashed too. You are LATE. This is not hedging.
Good point. The most important point of this thread is can anyone give a working example which A) makes money and B) is really a hedge. No one can answer this for sure. So I would say hedging is nothing but simply strategy. You may as well buy less to lower your risk or short less to lower your risk instead of buy two different equities. What if fundamentals change and your hedge is no longer a hedge...i.e. no relationship factor. So hedging is a fancy word for strategy.
