Related Hedges (How do they work?)
In this type of strategy profit is made when the shares go down as your main position is the short trade of the common stock. The convertible instruments will tend to move in about the same direction as the underlying (what it can be converted to) but less violently as they are traded less (lower volatility and lower volume in the market on both sides), however, they are not being used to make a profit so much as to hedge against the stock going up. Since both the bonds and the preference shares are higher on the list to be repaid if the company declares bankruptcy and the bonds pay out a fixed amount of interest as well, both also help protect against problems that may occur with a long position in the common stock.  Essentially the plan with this strategy is to earn fixed income on the bonds whilst the stock price drops and then to sell both the bonds and buy the stock back on the market to cover the short position. If the prediction that the stock will fall is wrong then you are still earning fixed income on the debt and are able to convert it into stock at the higher price to cover the short sale eliminating, or reducing, the loss made on the short sale. Effectively the profit here is made on the spread between the price of the bond, accounting for the conversion price, and the price of the stock and that fixed income is less volatile (except usually in the junk market) than stock.
I will be messaging you on [**2021-06-15 14:54:56 UTC**](http://www.wolframalpha.com/input/?i=2021-06-15 14:54:56 UTC To Local Time) to remind you of [**this link.**](https://www.reddit.com/r/finance/comments/6cvvei/a_hedge_fund_manager_is_supporting_a_free_masters/dixuco3)  [**CLICK THIS LINK**](http://np.reddit.com/message/compose/?to=RemindMeBot&amp;subject=Reminder&amp;message=[https://www.reddit.com/r/finance/comments/6cvvei/a_hedge_fund_manager_is_supporting_a_free_masters/dixuco3]%0A%0ARemindMe!  4 years ) to send a PM to also be reminded and to reduce spam.  ^(Parent commenter can ) [^(delete this message to hide from others.)](http://np.reddit.com/message/compose/?to=RemindMeBot&amp;subject=Delete Comment&amp;message=Delete! dixvaea)  _____  |[^(FAQs)](http://np.reddit.com/r/RemindMeBot/comments/24duzp/remindmebot_info/)|[^(Custom)](http://np.reddit.com/message/compose/?to=RemindMeBot&amp;subject=Reminder&amp;message=[LINK INSIDE SQUARE BRACKETS else default to FAQs]%0A%0ANOTE: Don't forget to add the time options after the command.%0A%0ARemindMe!)|[^(Your Reminders)](http://np.reddit.com/message/compose/?to=RemindMeBot&amp;subject=List Of Reminders&amp;message=MyReminders!)|[^(Feedback)](http://np.reddit.com/message/compose/?to=RemindMeBotWrangler&amp;subject=Feedback)|[^(Code)](https://github.com/SIlver--/remindmebot-reddit)|[^(Browser Extensions)](https://np.reddit.com/r/RemindMeBot/comments/4kldad/remindmebot_extensions/) |-|-|-|-|-|-| As far as i understand the big companies on the stock markets have automated processes that sit VERY close to the stock feeds and continually processes these with the intention of identifying an opportunity to take multiple small lots and buy/sell them as a big lot or vice/versa and do this before a buy or sell completes, thus enabling them to intercept the trade and make a small profit on the delta. With enough of these small gains on enough shares they make big profits and with near zero chance of losing. This is pretty basic question, but my head is confused :(  If you buy a $1000 bond with 5% interest rate, so it would be $1050 at maturity  what does it mean?  * you will be paid the interest in coupons (paid in coupons until it totals $50) and at maturity paid $1000 (in one large single payment) * you get paid the full value in coupons ($1050 split by multiple coupons)  Any other explanations of how a bond works are welcome, most of the stuff I could find was about what yield is, not how the bond actually works. The only way to hedge a position is to take on a countervailing position with a higher multiplier as any counter position such as a 1:1 inverse ETF will merely cancel out the ETF it is meant to hedge yielding a negative return roughly in the amount of fees & slippage. For true risk-aversion, continually selling the shortest term available covered calls is the only free lunch.  A suboptimal version, the CBOE BuyWrite Index, has outperformed its underlying with lower volatility. The second best way is to continually hedge positions with long puts, but this can become very tax-complicated since the hedged positions need to be rebalanced continually and expensive depending on option liquidity. The ideal, assuming no taxes and infinite liquidity, is to sell covered calls when implied volatility is high and buy puts when implied volatility is low. In a comment on this answer you asked  It's not clear to me why the ability to defer the gains would matter (since you never materially benefit until you actually sell) but the estate step up in basis is a great point! Could you describe a hypothetical exploitive scenario (utilizing a wash sale) in a little more detail?  This sounds like you still have the same question as originally, so I'll take a stab at answering with an example.   I sell some security for a $10,000 profit.  I then sell another security at a $10,000 loss and immediately rebuy.  So pay no taxes (without the rule).  Assuming a 15% rate, that's $1500 in savings which I realize immediately.  Next year, I sell that same security for a $20,000 profit over the $10,000 loss basis (so a $10,000 profit over my original purchase).  I sell and buy another security to pay no taxes.  In fact, I pay no taxes like this for fifty years as I live off my investments (and a pension or social security that uses up my tax deductions).  Then I die.  All my securities step up in basis to their current market value.  So I completely evade taxes on $500,000 in profits.  That's $75,000 in tax savings to make my heirs richer.  And they're already getting at least $500,000 worth of securities.   Especially consider the case where I sell a privately held security to a private buyer who then sells me back the same shares at the same price.   Don't think that $10,000 is enough?  Remember that you also get the original value.  But this also scales.  It could be $100,000 in gains as well, for $750,000 in tax savings over the fifty years.  That's at least $5 million of securities.   The effective result of this would be to make a 0% tax on capital gains for many rich people.   Worse, a poorer person can't do the same thing.  You need to have many investments to take advantage of this.  If a relatively poor person with two $500 investments tried this, that person would lose all the benefit in trading fees.  And of course such a person would run out of investments quickly.   Really poor people have $0 in investments, so this is totally impractical. "Would still be affected by energy prices, labor, weather, and any other input they don't have full control over. Labor and weather can never be controlled.  Other users of beef may have a derivative hedge. A derivative hedge would likely provide more direct (maybe short term) protection than a vertical integration hedge.  With a financial hedge all of the secondary risk factors are ""incorporated"" while with vertical integration you are still left with the risk of each and every input to the final product that you do not control.  Vertical integration is done for a lot of reasons and it doesn't always result in lower than market costs, especially over any given period." They just let you borrow a little more every months. When the owner dies/sells they get all their money + % back. The word 'hedge' emerges from early agriculture when farmers would ask the market for a minimum buy price for each crop they planted. They used this method to stop loss against any major losses.  Investors today use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge). Oh I get it now, I got confused cause your comments wasn't added below the other ones you had written before, it doesn't show up in the comment chain  https://www.reddit.com/r/finance/comments/6io7o5/how_can_i_profit_off_of_bubbles/dj96e4o/  same with this one, I'm guessing you wanted to reply to https://www.reddit.com/r/finance/comments/6io7o5/how_can_i_profit_off_of_bubbles/dj9jk91/ Inflation protected securities (i-bonds or TIPS).   TIPS stands for Treasury Inflation Protected Securities. By very definition, they tend to protect your savings against inflation. They won't beat inflation, but will keep up with it. TIPS or iBonds have two parts. A fixed interest part and a variable interest portion which varies depending upon the current rates. The combined rate would match the inflation rate. They can be bought directly from the treasury (or from a broker or bank who might charge a commission) My understanding of this would be that this is for the portion of the subsidiary which they do not own. In other words they record 100% of the subsidiary on their books and then make this entry to account for the % which another company has a minority interest in. A simple example - When looking at oil trading in different locations first I have some back of the envelop adjustments for the grade of oil, then look at storage costs (irrelevant in the case of electricity) and transport costs between two locations to see if physical players are actively arbing the spread.   No strong views on reading material in this specific area - Google, google scholar and amazon all have relevant material.  When it comes to your current problem, here are some questions to think about:  1. Is the power generated from the same commodity at location A and location W?   2. How has the spread changed in the past? Has trading location W actively hedged the worst cases of prices moves in location A?   3. Is it feasible to trade the commodity that location A generates the majority of its power from/how does that compare to electricity trading at location W as a hedge?  4. If hedging is really desirable, are you sure you can't do an illiquid over the counter hedge at location A? Paying a little bit more in the bid/ask for the hedge could be more desirable than trying to jump into a market you yourselves don't quite understand.  5. If your consultants come back with just some hedge ratios without discussing what drives the spreads between the two locations and where the spreads are currently be skeptical. There are several ways to protect against (or even profit from) a market correction. Hedge funds do this by hedging, that is, buying a stock that they think is strong and selling short a paired stock that is weak. If you hold, say, a strong retail company in your portfolio, you might sell short an equal weight of a weak retail company.  These are like buying insurance on your portfolio. If you own 300 shares of XYZ, currently trading at $68, you buy puts at a level at a strike price that lets you sleep at night. For example, you might buy 3 XYZ 6-month puts with a strike price of $60. A disadvantage is that the puts are wasting assets, that is, their time premium (which you paid for at the outset) becomes zero at expiration. (This is why it is like insurance. You wouldn't complain that your insurance premium was lost when you purchase insurance on your house and the house doesn't burn down, would you? Of course not. The purpose of the insurance is to protect your investment.) Note that as these puts are married, they only protect your portfolio. Instead of profiting from a correction, you would merely protect your portfolio during a correction. (No small feat!) If your portfolio is similar to the market, you can buy S&P index puts. If your market reflects a lot of technology, you can buy technology sector puts.  Say you have a portfolio of $80K that reflects the market. You could buy out-of-the-market puts (again reflecting your tolerance for loss). Any losses in your portfolio after the puts go in-the-money would be (more or less) offset by gains in the puts.  An advantage is that the bid/ask spread is smaller for the S&P. You would pay less for the protection. Also, the S&P puts are cash settled (meaning you get money put in your account on the business day after expiration day). A disadvantage is that the puts do not linearly go up as the market drops. (Delta hedging is a big deal in and of itself.) Another disadvantage is that they are wasting assets (see the Married puts section, previous). While the S&P puts can be used to maintain your market portfolio in the midst of a correction, you could purchase more puts than needed. If you had correctly timed the market, then your portfolio with puts would increase. (Your mileage may vary; some have predicted an imminent market crash way too often.) Collars involve selling out-of-the-money calls and using the premiums to buy out-of-the-money puts. There are many varieties of collars, but the most straightforward is to sell 1 call and buy 1 put for every 100 shares. (This can also be done for index puts and calls.) This has the effect of simultaneously: You get your insurance for almost free. But again, it is protecting your portfolio.  As the name implies, you make money when the market goes bearish.  Bear put spreads involve buying puts at a close strike price and selling an equal number of puts at a lower strike price than the first. You have a defined maximum loss (the premium you paid for the higher put minus the premium you received for the lower put). You have a defined maximum gain (the difference between strikes minus the defined maximum loss).  Buy S&P 500 index puts. If you buy deep out-of-the-money puts, it won't cost much, but you have little probability of it paying off. But if they go in-the-money, there could be a sizable payoff. This is similar to putting one chip on red 18 on the roulette wheel. But rather than paying off 35:1, it is a variable payoff. If you're $1 in the money, you just get $100. If you're $12 in the money, you have a $1200 payoff.  If you buy at-the-money puts, it will cost a lot, and your probability will be about 1 in 2 that you will pay off. In our roulette analogy, this is like putting 30 chips on the Even bet of the roulette wheel. The variable payoff is as in the previous paragraph. But you're more likely to get a payoff. And you will lose it all of the roulette ball lands on an Odd number, 0, or 00. (That is, the underlying of your put goes up or stays the same.) If your research shows you what good stocks to buy, it may also tell you which stocks are ripe for a fall. You could short-sell these stocks or buy puts on them.  Similar to short-selling stocks or buying puts, you could sell short overpriced sectors or buy puts on them. There are ETFs that will allow you benefit from falling prices without needing to have a margin agreement or options agreement in place.  Sorry to have a lengthy answer. Many other answers emphasize that one shouldn't try to time the market. But that is not the OP's question. Provided here are both: The biggest problem is that the rate of return for a completely immunized program is really low.  Especially, now, given the low rate of return, the cost of such a program makes it nearly unfeasible, unless you assumed a ridiculously low rate of return (&lt;1% return).  As it is, they're assuming a 4.5% rate of return, which is about 2% above inflation, a very very conservative forecast.    Plus, not every pension plan could immunize their plans.  All that does is shift interest rate risk (btw, not the only type of risk that exists, there's credit risk as well.  To get rid of both, you'd be getting marginally above 0% return, not something you can run a pension plan on).  So, you'd have to have someone or some set of people that have a very large and very unnatural interest rate risk.  If you had a large move in rates, it would demolish those people, which would completely invalidate those hedges.  It's much better for the economy on whole that pension plans are able to take credit and interest rate risk. "Let's summarize your relative's problem: How is this possible? If both of those statements are true, then he should be able to explain exactly why those statements are true, and then you can explain it to us, and then we can all nod our heads and admit, ""Wow, that makes sense. Proceed if you want to."" But until that happens I suggest you take the advice I offered in the first paragraph of this answer."