What's the point of hedging?

I understand that if you have investments in a foreign country you would want to hedge your investment against any adverse translation effects.

However, what is the point of hedging if you invest in your own domestic market? If you want to limit exposure and limit risk, why go through all this pain and not just invest in bonds?!



I am not sure this is in reference to what session, but off the top of my head for example I can think of tens of reasons why you may want to hedge.

-University ednodwment got a stock as a donation, if they sell it the donator who owns the company may feel they dont have faith in his company, he wont donate again.

-YOu are expecting losses next year and would like to offset gains against losses for tax purposes, however you are worried till then your stock goes down.

-You want to go on a long vacation and a stock is worrying you, it is a major part of your personal portfolio, you want to keep the company, hedge it till you get back so you can enjoy the vacation.

-Your company gave you stock and you cant sell for 5 years, you dont think the company has good prospects…

I hope this helps, offcourse if this is what you were looking for, I am sure now you can think about it and come up withh 100 examples of your own

To follow up on your question and your idea of simply going for fixed income securities, well those carry their own risks, and even if from top gov you still have interest rate risk which is not to be underestimated…

Also, I assume by hedging you dont means 100% hedge, you mean all hedging staratagies in general, I would call a protective put a hedge, you may have one on a stock that you think has much higher volitility than the market does, you protect yourself against the downside, and you will make some nice gains on the upside…

So being hedged does not mean you will settle for very low returns, although I belive you must pay for the hedge one way or another, options you pay upfront, futures you give up the upside if your expectation were wrrong, and so on…

Thanks a lot…i guess I was looking at it from the wrong point of view…what you said totally makes sense… :slight_smile:

How did you pass level 2??

Dont know!! That was back in 2009… :stuck_out_tongue:

You might think that you have an informational advantage in the international market meaning that you can find alpha there;

you might think that you have found a set of assets with a low correlation with domestic securities, even after hedging;

you might have unique circumstances that drive you to have foreign investments;

I got to be honest myself, looking back at the sheer amount of material in level 2, I’m not sure how I passed myself… Haha