[thetoddgreen]

So, I remember having trouble with this in school… but I could always play the part and know “the right answers” because I would follow blindly, but I never quite grasped it.

Hedging… I have seen it a lot now that I am finishing up the Econ section, but it is never dug into as if it’s some commonplace understanding

I know what hedging MEANS, like it’s definition as verb… reducing/limiting [risk] basically. However, I don’t grasp the concept on how it actually works. Could someone break down a thorough example or something? I feel if it’s explained practically with real-life scenario … I should be able to grasp it finally. I just need that switch to flip for me

[Spartans92]

I'll try my best.. My best example is to think hedging as insurance. You buy insurance so you could protect/shield from any liabilities in case of an accident.

Its been a while since I visited BEC but FAR will cover it more in depth. But yea thats the best example I can give at this point. Hopefully, others can offer more examples. Good Luck and have a wonderful holiday!

BEC- PASS

[thetoddgreen]

@Spartans92 – I read a similar example. I get how it can ‘act' like insurance… but how does someone do that with investments, trade, international issues, etc. Because insurance is letting someone share the risk. Is hedging a specific activity, or am I thinking it wrong… and actually know what hedging is but just not different methods? I have come to realize I overthink things way too much since starting my studying

[aaronmo]

It's no more complex than what you said…it's planning for risk. You hedge your bet.

The easiest example is if someone owes you euros in 3 months, and you're worried they won't be worth as much in 3 months, you might hedge by getting a put option giving you the right to trade Euros at a price now. If you were a farmer, and you were worried that corn prices would rise, you could have a contract with a corn seller letting you buy a fixed amount at a fixed price. Hedge is just a tool to address risk.

They can be contracts, options, buying something today to sell tomorrow…

Make sure you know the formal definition, which was something about future cash flows.

[Author]

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