The risks of hedging

In this episode, Prof Steve Keen and host Phil explore the complexities of hedging, its applications, pitfalls, and its impact on markets and the economy.

Hedging, rife in the financial and commercial world, is designed to protect our investments. If prices of our investments go down, or the cost of our business inputs go up, hedging is the insurance that stops things getting too bad.  But does it work?  Steve argues it doesn’t work when there’s financial crisis - when all prices go the same way.   The example is people who have bought gold to hedge against equity investments, if they are forced to sell leveraged shares, they might recover their position by selling the gold, forcing that down in price too. Phil also asks whether hedging creates a distortionary impact. For example, stable companies might see higher share prices because they are seen as safe, rather than having any growth potential.

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