Not a garden purchase.
The buying of a hedge is "life insurance for a security investment." A buying hedge is a purchase contract to buy a derivative of an asset, locking in the price.
It can take a few forms. One could be a futures contract. This contract binds the two parties to either buy or sell the shares at a specific price at a specific time in the future. The contract can be held (and designed) by either the buyer or seller. Agreements like this can be used if an investor thinks they’ll want an asset in the future, and they want to lock in the price today. It could be done by a business as well, if it anticipates having too much of a resource in the future, and wants to get rid of it at today’s nice price.
Say you’re an investor, and a certain technology looks promising. The latest gadget trend, the latest app craze (Pokemon Go Away), etc. Problem is...you don’t have the money right this second. This agreement lets you specify a purchase agreement with that company in the future (when you have the money...you hope). They sell their shares and make money, you get a piece of the investment you want. Everyone wins.
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Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]
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