Give a simple example of a classic hedge! I don’t quite understand how it happens



The author posted a question in Business, Finance

Give a simple example of a classic hedge! I don't quite understand how it happens? and got a better answer

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Response from 0[+++++]
Classic hedging is when you have a position on one financial instrument but you use another financial instrument to cover a loss should the price of the current financial instrument move in your direction = it could be an option or a futures.

Response from 0[+++++]
Hedging is the opening of two opposite transactions in different markets to cover possible losses on one of them. In other words - it is a protection against financial losses Open Wikipedia it is written in very simple language

Response from 0[+++++]
Classic hedging is Alfred Winslow Jones. An investor buys stocks which in his opinion should show a performance above the market average and sells short stocks which in his opinion should show a performance below the market average by the same amount. That is the net exposure of shares as an asset class is zero and all the risks are idiosyncratic, i.e. inherent to individual securities rather than to shares as an asset class. In other words, the market risk is hedged.

Response from 0[+++++]
Bought Gazprom shares - sold futures on Gazprom shares Bought Gazprom shares - sold futures on the RTS Index Bought a futures on the RTS Index - bought a Put option

 

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