Danio
New Member
Heyoz pplz, can you guys tell me what the term Hedging meanz? Its been bothering me for quite some times...i still dun quite get it when my teacher explained to me...
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Bs Termz... (1 Viewer)
- Thread starter Danio
- Start date
truly-in-bliss
my love is like woah!
- Joined
- Jun 3, 2003
- Messages
- 2,995
- Location
- Strathfield, Sydney Gender: Female
- Gender
- Female
- HSC
- 2003
Hedging basically means eliminating risk.
For example, say we simultaneously find a $1 coin on the street. Unable to decide who should keep it we opt to flip for it - heads and I win the coin, tails and you win. (i.e. you either get $1 or $0)
Now, say that you don't like that risk (maybe you need 40 cents for the bus ride home). You could hedge by betting me 40 cents that heads will come up.
What happens now?
Supposing heads comes up
I get $1.00 from the flip. I give you 40 cents for winning the side bet. (i.e. I end up with 60 cents and you end up with 40 cents).
Supposing tails comes up
You get $1.00 from the flip, but must give me 40 cents because you lost the side bet. (i.e. I end up with 40 cents and you end up with 60 cents).
By hedging you eliminated the risk that you would end up with nothing. Of course, the downside is that you also eliminated the chance to end up with $1.00.
For example, say we simultaneously find a $1 coin on the street. Unable to decide who should keep it we opt to flip for it - heads and I win the coin, tails and you win. (i.e. you either get $1 or $0)
Now, say that you don't like that risk (maybe you need 40 cents for the bus ride home). You could hedge by betting me 40 cents that heads will come up.
What happens now?
Supposing heads comes up
I get $1.00 from the flip. I give you 40 cents for winning the side bet. (i.e. I end up with 60 cents and you end up with 40 cents).
Supposing tails comes up
You get $1.00 from the flip, but must give me 40 cents because you lost the side bet. (i.e. I end up with 40 cents and you end up with 60 cents).
By hedging you eliminated the risk that you would end up with nothing. Of course, the downside is that you also eliminated the chance to end up with $1.00.