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mitte
Posted on: 2011/2/24 17:58
Not too shy to talk
Joined: 2008/6/19
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Posts: 32
Why do we do hedging?
Why does a trader do hedging?
For example, if he sells a call option then he will maintain hedge portfolio according to black scholes formula. In the end he will get risk free return.
If the trader is not willing to take the risk, then why does he trade the call in the first place? This question has always puzzled me.
ajay
Posted on: 2011/2/27 23:30
Just popping in
Joined: 2009/11/13
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Posts: 1
Re: Why do we do hedging?
The basic idea of trading is maximizing your returns while minimizing your risk.
Most of the time traders get into a position not because they are betting on the direction, but because they are taking advantage of a temporary market inefficiency. i.e. they are doing an arbitrage.
Another reason traders hedge is because most of them try to capture alpha, so they hedge their portfolio with an equal beta.
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