[AccessD] Hedging Your Bets

Arthur Fuller fuller.artful at gmail.com
Mon May 5 10:34:27 CDT 2008


Sorry for the double-post, but I'm in a need-to-know position. Has anyone
done an app related to hedge-funds? I vaguely understand the concept but I
want to know if anyone has a model to work from. Should puts and gets be in
the same table or separate tables? How should progress be tracked (i.e. IBM
moved from $1 to $1.14 in the last three months)? This is a whole new world
to me and any advice will be appreciated.

I don't even understand the rudiments. Given that I am a hedge participant,
how often would I be likely to place a bet? Once an hour, once a day, once a
week, once a quarter? Suppose that I am totally convinced that Sun+MySQL is
a huge score, and that the current price is $1. I want to buy a million
shares, but I also want to hedge my infatuation with a bet going the other
way that says maybe I was over-enthused by her breasts or some other quality
and I could be wrong, so then I bet that I sell those million shares at some
price and the difference between them is what I'm risking, less the broker's
fee. Do I have this correct or am I missing key components?

I confess to complete ignorance about this stuff. I vaguely comprehend that
a put and a get balance each other out with a margin, and that that's what
the hedge-bet is all about. But I don't comprehend several other critical
factors, such as:

Suppose I bet that IBM will be worth $2 on June 1.
Suppose that you think IBM will be worth $1 on June 1.
Suppose that the current IBM price is $1.50.

I'm already dizzy with this stuff. I propose to buy it as a future (I'm not
even sure what that means, but I think I have that concept), so I spend no
money today but I guarantee to purchase one share of IBM on May 31 so that I
have it for sale on June 1. I have made an offer to purchase said one share
at $1. Somebody accepts, then I am in a position to sell same at $2 on said
day.

I realize that the numbers that I have chosen above are unrealistic, but I
am just trying to get to the basics of this. As I currently understand it, a
hedge is a bet in both directions, and the point is to minimize the
distance. I could be wrong, and it would only be the 1758th time in my life,
but that's the feeling that I'm getting. You bet both ways, you subtract and
that's your piece.

Next layer: I'm doing this on behalf of somebody somewhere who has tossed a
million Euros into the pile. Now I'm playing with those Euros and I'm
guessing that Sun's acquisition of MySQL is a brilliant move and I want to
party in this arena. So I plonk a Euro into this party and I'm confident
that it will become 2 Euros in a week or month. To hedge this bet, I need to
find someone who... I'm dizzy again... I don't understand this stuff... ok
so to hedge this bet I need to find someone who doesn't believe that Sun's
value will increase due to its acquisition of MySQL... but even that's
incorrect. I need to find someone who doesn't believe the value of Sun's
shares will increase as much as I think they will.

Is all this correct or even close? I'm in a whole new universe here and I
have no idea whether my perceptions are accurate or woefully amiss.

I know that these lists are mostly about code but this is vaguely related to
code, so please allow this off-topic question.

A.



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