Monday, August 24, 2009

risk selection through hedging

In the preceding paragraphs we have described a complete (perfect) hedge. Such a hedge is essentially a profitless hedging position. Many speculators and investors, however, are willing to take on added risk by not fully closing a hedge, believing they can guess correctly which way prices are going. Through the future market, the investor can literally "dial" the degree of risk he or she wishes to accept. If the investor wishes to take on all the risk of price fluctuations in the hope of achieving the maximum return, no hedging will take place. On the other hand, risk can be eliminated completely by using a perfect hedge.

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