December 2015
Beginner
384 pages
11h 32m
English
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Chapter 13
Hedging Bets
In This Chapter
Knowing when to hedge
Choosing your exposures
Monitoring and adjusting hedges
Taking hedges off at the right time
In financial terms, to hedge means to reduce risk by taking on an offsetting risk. A common example is buying insurance. You bet with an insurance company that your house will burn down this year. You pay £2,000 (the premium), and if you’re right, the insurance company pays you £500,000. Considered in isolation, this bet is risky, but it still reduces your risk because the combined value of your house plus insurance policy has less volatility than the value of the house alone.
Although risk managers use hedges all the time, you don’t have to like them. You only consider hedging when you hold a risk you don’t want. In that circumstance, your first instinct should be to get rid of the risk. People buy fire insurance on their houses mainly because they couldn’t afford to replace them if they were to burn down. Considered as a pure risk ...
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