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Traders hedge to reduce their risk. However, wouldn't reducing the position achieve the same results while keeping the risk management process simpler? At least, one need not worry about making the wrong hedging calculations.

What are the pros and cons of each approach?

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closed as too broad by chrisaycock Oct 6 '13 at 15:37

There are either too many possible answers, or good answers would be too long for this format. Please add details to narrow the answer set or to isolate an issue that can be answered in a few paragraphs.If this question can be reworded to fit the rules in the help center, please edit the question.

    
As with your previous question, the answer is: it depends. You do realize that this site is for professional quants, right? –  chrisaycock Oct 6 '13 at 15:38

1 Answer 1

You may not be able to reduce a position. Either because there is no liquid markets (for exotic and less transparent derivatives markets) or your position is to big to reduce at once (if you take on big positions versus an institutional client (e.g., pension fund) you may not be able to go to the market to reduce it all).

Plus, the whole point of trading is to (facilitate clients and) make money. Reducing positions is less profitable than trading it out in general.

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Good answer. However, for retail investors, it may be better to simply reduce the position size, particularly if their position is small and the market (usually equity) is liquid enough for their tiny position. –  curious Oct 6 '13 at 10:42

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