Hi, I’ve known about future/forward contract but when getting into hedge, I’m extremely confused. I know the purpose of hedging is to diverse away the risk of getting money loss, also decrease the opportunity to gain large. I just don’t get how it work/process in reality.
In: Economics
Hedging is also done to remove the effects of uncorrelated assets. For example, I buy equities priced in Euros, but my assets are denominated in US Dollars. I believe I am a much better stock picker than currency trader, so I want to capture the growth of the equities alone, uncorrelated to the movements of the two currencies. I would buy futures contracts on Euros to hedge the currency risk.
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