Assuming that the price of Litecoin on the A exchange is 1,000 yuan and the price of the Litecoin on the B exchange is 1,200 yuan, then is the price of Litecoin supposed to be 1,000 yuan or 1,200 yuan? Or is the price of 1,100 yuan between the two justified? Or is the other price justified? This is not important. The important thing is how to profit from the price difference.
If you buy a price of 1,000 yuan for a multi-exchange exchange, you might get Litecoin soon to rise to 1,200 yuan. You will soon make 200 yuan, but you may also not earn a penny, because the final situation may be B. The price of the exchange's LTC soon fell to 1,000 yuan, which is equal to the price of the A exchange.
However, there may be two other situations where the prices of the two exchanges have fallen below 1,000 yuan, or the prices of both exchanges have risen above 1200 yuan.
In this case, there are a lot of uncertainties and you can't guarantee a stable profit. You don't know whether you should spend more than 1,000 yuan for LTC on the A exchange or 1200 yuan for the LTC on the B exchange. This will make people more tangled. How to get rid of this tangle, and make money without risk?
We can take the following approach:
You can divide the amount of the investment into the same two, to make more than 1,000 yuan of Litecoin on the A exchange, and to short the 1,200 yuan of Litecoin on the B exchange. Why is this method no risk?
We can assume that the price of Litecoin eventually became 1100 yuan. Then we earned 100 yuan on the A exchange and made 100 yuan on the B exchange, which added up to a total of 200 yuan.
If the LTC currency encounters a big bad news pressure, the price will eventually plunge to 900 yuan, this time, you have done a loss of 100 yuan on the A exchange, earned 300 yuan on the B exchange through short, and finally calculated, you Earn a total of 200 yuan.
In the same situation, if the LTC suddenly does not know why, it suddenly rises to 1,500 yuan. At this time, you make a profit of 500 yuan on the A exchange, and on the B exchange, you lose 300 yuan through the short, and finally calculate it. You made a total of 200 yuan.
In the end, you discovered that as long as there is a spread in the market, with this method of hedging, no matter how the market changes, you can stably make arbitrage. There is almost no risk. If you are a risk averse person, you only want to make money without risk. This method may be more suitable for you.
So what is the hedge?
In finance, hedging refers to investments that deliberately reduce the risk of another investment. It is a way to reduce profits while still being able to profit from investments.
A hedging transaction involves the simultaneous execution of two transactions that are related to the market, are in opposite directions, and are equal in amount and offset. The premise and core of hedging is that two negatively related species can be found.
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