GammaJammer
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which guy?
Can someone please give me a real world example of hedging please?
scose-no-doubt
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the OP guy
GammaJammer
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maybe so (I have no idea) but definitely wasn't talking options in THAT post. was a classic 'not really hedging' question
You guys have all been so helpful, Many thanks
gedward3,
Those link you gave me made me completely understand hedging but something I forgot to mention was that from everywhere I look across the net, I cannot find information on the hedge premium. Or how to work out, I know every instrument is different, but how do you work it out on the emini s&p 500?
gammajammer,
Many thanks for that very detailed info on hedging, lot's of great info right there. I am starting to think hedging isn't that difficult after all. Of course I have still a lot to learn about it.
gedward3,
Those link you gave me made me completely understand hedging but something I forgot to mention was that from everywhere I look across the net, I cannot find information on the hedge premium. Or how to work out, I know every instrument is different, but how do you work it out on the emini s&p 500?
gammajammer,
Many thanks for that very detailed info on hedging, lot's of great info right there. I am starting to think hedging isn't that difficult after all. Of course I have still a lot to learn about it.
GammaJammer
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sopodo - it might help if you tell us what you mean by 'the hedge premium'
findlay234
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As I understand it (and please, someone, correct me if I’m wrong)
Another simple example of real world hedging…
You run a British auto parts company, company A, who manufactures components in the UK but buys sub-components from Germany and the USA, companies B and C. A large car manufacturer, company D, orders a batch of components from you. In writing the invoice you will have to factor in all costs in order to come out with a profit for the job. Most of their costs will be fixed (overheads, labour, cost of materials and parts) but parts bought from companies B and C are paid for in Euros and Dollars so may vary (in Pound terms) due to exchange rate changes between now and the time you pay for the components. It may change for the better in that your currency gets stronger and you can then make more profit from the original deal but it could get worse. Your job is to make profit from manufacture of goods and not betting on foreign exchange rate movements (leave that to the banks and the traders). In order to negate the risk of the FX market moving against you, you hedge your orders by exchanging money for the sub-component contracts into their currencies early. This way you can predetermine the profit you will make on the deal and not have to worry if the markets will remain stable. There are other factors involved but this is a simple example.
As I said that’s my understanding of it.
Cheers
Fin
Another simple example of real world hedging…
You run a British auto parts company, company A, who manufactures components in the UK but buys sub-components from Germany and the USA, companies B and C. A large car manufacturer, company D, orders a batch of components from you. In writing the invoice you will have to factor in all costs in order to come out with a profit for the job. Most of their costs will be fixed (overheads, labour, cost of materials and parts) but parts bought from companies B and C are paid for in Euros and Dollars so may vary (in Pound terms) due to exchange rate changes between now and the time you pay for the components. It may change for the better in that your currency gets stronger and you can then make more profit from the original deal but it could get worse. Your job is to make profit from manufacture of goods and not betting on foreign exchange rate movements (leave that to the banks and the traders). In order to negate the risk of the FX market moving against you, you hedge your orders by exchanging money for the sub-component contracts into their currencies early. This way you can predetermine the profit you will make on the deal and not have to worry if the markets will remain stable. There are other factors involved but this is a simple example.
As I said that’s my understanding of it.
Cheers
Fin
scose-no-doubt
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I think commercial entities usually hedge currency risk in futures markets or money markets depending on which gives the best rate i.e. discount factor<net interest paid or vice versa
Many thanks for the reply findlay234, what you describe is hedging and thanks for the explanation. Everyone's examples I am finding very useful as I get my head around this very useful thing.
Thanks for the reply,
I read somewhere that when you want to hedge your portfolio whether you only have one product or more you can take out a hedge position over your total portfolio. This comes at a price, which is known as the hedge premium, their is also interest charged on a hedge like the interest for margin. But a day trader like myself who closes their positions at the end of the trading day and does not hold them overnight does not pay any interest on margin. Interest is only charged for long term futures traders. Anyway let's get back to the hedge premium. I read many trading sites that talk of this hedge premium but they never make mention of the premium price, they say it depends on the instrument and their is some kind of calculation you do to find the price. Is this correct?
Thanks for the reply,
I read somewhere that when you want to hedge your portfolio whether you only have one product or more you can take out a hedge position over your total portfolio. This comes at a price, which is known as the hedge premium, their is also interest charged on a hedge like the interest for margin. But a day trader like myself who closes their positions at the end of the trading day and does not hold them overnight does not pay any interest on margin. Interest is only charged for long term futures traders. Anyway let's get back to the hedge premium. I read many trading sites that talk of this hedge premium but they never make mention of the premium price, they say it depends on the instrument and their is some kind of calculation you do to find the price. Is this correct?
JahDave
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90% percent of people lose in any market. If you want to win then you must be in the top 10% of any market.......
GammaJammer
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Find us an example of one of these websites talking about this stuff and lets go from there. It all sounds either terribly vague, or nonsensical (or maybe both) so little point in constructing an answer till I / others here can see exactly where you got this idea from.
Many thanks for your reply and for offering to look into this in more detail. But these last few days I have been reading tons on hedging and think I may of got a little confused on this hedge premium idea and probably got confused with there be a hedging interest. Still please confirm if this is correct. As well I went over the 3 links that were posted on page 3 by gedward3 and they do some talking of this hedge premium on the link talking about hedging in oil. I think what I have done is when they talk about there being a premium I thought it's like an extra fee you pay. But I now believe and please confirm that when they talk of this hedge premium this is just the option premium to take out a put or call hedge position. Is that correct?
But then how is it you hedge your entire portfolio. I read some site about you can take out one hedge position that can cover the entire portfolio. is that even possible on say a portfolio with 100 stocks?
Many thanks in advance
