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Thread: Not quite understanding a hedging concept..

  1. #1
    Actuary.com - Level I Poster
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    Not quite understanding a hedging concept..

    In many learning materials, they have you take the long position of the asset you are owning or manufacturing, and then you have a short forward contract. What I don't get is why they combine the profits of both things. I.e. it takes $80 to manufacture something, the price of it in 6 months is $60 and you have a $100 short forward contract. Why do you take the profit of if you sold it unhedged and add the short forward contract profit as well? Doesnt short forward give you the right to sell it at a certain price? It seems like there's some kind of step missing here or something...

  2. #2
    Actuary.com - Level I Poster
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    hmm nevermind i think i understand it. you combine them since when you make them you are essentially taking a long position in them(i.e. like buying shares of the stock). by taking a short forward position or purchased put you are gaining the ability to sell them at a certain price but you still have to figure in the profit you made from your long position(buying or making them). is this right?

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