Why people need to hedge in this kind of market or in any kind of market at all? From the second I try to answer the question, I am lost. Confusion 1: Full hedge means zero net sum + commission + slippage costs, doesn't it? Confusion 2: Partial hedge means spreading, doesn't it? Confusion 3: Does hedging mean enter and exist simultaneously? If not, the legging process is till a gamble isn't' it? Confusion 4: Haven't simply buying stock done better than any hedging strategy in the past year or not? 100% up room to go without hedging, particularly for small friends.
[bold/]Why people need to hedge in this kind of market or in any kind of market at all? From the second I try to answer the question, I am lost. [/bold] Confusion 1: Full hedge means zero net sum + commission + slippage costs, doesn't it? Full hedge means there is absolutely no market risk, most people do not take into account slippage and commissions. Confusion 2: Partial hedge means spreading, doesn't it? Partial hedge usually means spreading, exact definition is a hedge allowing some market risk. Confusion 3: Does hedging mean enter and exist simultaneously? If not, the legging process is till a gamble isn't' it? Hedgeing does not mean entering and exiting simultaneously. Hedging means to take both sides of a position in order to manage risk. Legging process in real world terms has risk. Legging out of a position has even bigger risks if the position goes against you. Confusion 4: Haven't simply buying stock done better than any hedging strategy in the past year or not? if you buying and holding for years, then yes. This past year has had a bullish run, but the years before was bearish and once this bull run comes to an end a bearish run will start. Do not extrapolate how the market behaved in the past year as how it will continue reacting forever.
Some instruments are suited to trade in 1 direction and not both. Others are not economical to abandon the position due to multiple market factors, so instead of covering, you hedge. So, some positions you hedge because its too expensive to start the position from scratch, others you hedge because its too expensive to exit position. I'm sure there are other reasons, but I usually avoid hedging as well, due to increased costs. It depends on what you're trading, though.
Don't forget history once again: the very origin of derivatives is justified by hedging. If you had followed any courses on that, the professor always begin with the example of a farmer who has some wheat to sell in the future and for him to be able to garantee his price he would sell a future contract on the market to lock his profit on his harvesting. In summary it was normally assurance against .... risk of volatility. Since risk can only be transfered and not eliminated they justified the need for speculators the only ones who would accept this risk. Of course what the story doesn't tell is that when the big farmers like Cargill are on both sides of the deal (since Cargill is one of the biggest agriculture corporate and at the same time one of the biggest broker on futures) ...
Some funny report here (you will discover once again how small the World is with the same usual protagonists ) http://www.skolnicksreport.com/soybean.html btw from the incredible skolnicks the man who fears nothing with his heavy paralitic handicap kind of modern Daredevil if you don't know him here's a taste Depicted above is the new book Illinois Justice by Kenneth Manaster, a law professor, who tells all the ins and outs of one of the biggest judicial bribery scandals in U.S. history. The scandal catapulted John Paul Stevens, special counsel to an investigating commission, to fame as a justice on the U.S. Supreme Court. The commission heard bribery accusations tendered by legal researcher Sherman Skolnick, which made him likewise well known. Skolnick uncovered documents in the basement of a county building showing that two judges on the Illinois Supreme Court were bribed by a banker, Theodore Isaacs, former chief tax collector of Illinois, to wipe out criminal charges against Isaacs. In August 1969 Time Magazine featured a story about Skolnick and the Illinois scandal that later finally put the former director of the Illinois Department of Revenue in jail along with his accomplice, a sitting federal appeals court judge.
Hello Harry. Nice! Yes, I was talking about speculators not hedgers. It doesn't make sense for small speculators to hedge. When one needs or wants to hedge, it usually means he or she needs an exit.
A hedger is normally not a speculator ... normally that's what in the scholar book but in real world you have read the article so