| Topic Name: |
What is hedging? |
| Message Name: |
Simpler Example..... |
| Date Posted: |
06/28/2001 |
| Message: |
Fund Manager calls bank and says, "Buy me 200 million dollars worth of S&P 500 stocks."
Bank says, "OK".
Since bank is risking its own capital it wants to protect itself (i.e., hedge its risk) about laying out all that dough.
Bank sells $200 M S&P Futures to protect itself. If market goes up, bank makes money on the stx it bot and loses on the futures. If market goes down, bank makes money on futures and loses on stocks. Either way, the bank has minimized its risk.
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