Hedging Risks Thanks to the Market
We will start our discussion with an example. Since the price of the American dollar in euros is quoted at each instant in time, all the players on the currency market who hold a portfolio in dollars and euros can buy and sell continuously one of the currencies against the other. To sell a certain quantity then to rebuy it is not the same as buying the same amount then selling because the price varies at each instant. One clearly tries to sell dollars when the price is high, and buy when it is low, but the price changes in an unpredictable way. Through this buying and selling, the composition of the portfolio varies. Let S t , denote the price of the dollar at time t.
KeywordsStock Market Financial Market Future Contract Classic Asset Exercise Price
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