A+perfect+hedge,+Letter,+Business+Day

Business Day, Johannesburg, Letters, 30 June 2006
=A perfect hedge=

For those who get a little confused when financial traders talk about hedging, here is a purely hypothetical worked example that elucidates the concept.

A year ago, you phoned Telkom and signed up for their ADSL service. As they started charging you (10 seconds after your call) you phoned your broker and bought 400 Telkom shares at R110 a share.

Three months later you phoned to cancel ADSL because it still hadn’t been installed. After a further nine months you finally got Telkom to stop charging you for the service.

There is now an R8160 bill outstanding and you decide to pay it to avoid being credit blackballed, to have your telephone reconnected and because their customer service team has eroded the fight out of you.

On the upside, your shares now stand at R130 (they were always going up due to low service costs and high service charges at Telkom). This means you have made R8000 on your shares and lost R8160 on your phone charges. Net loss: a mere R160.

A near-perfect proxy hedge and one that you can replicate with any other parastatal service provider that is in a position to charge you “monopoly money”.


 * Hugh Hawarden**


 * Parkview**


 * From: http://www.businessday.co.za/articles/opinion.aspx?ID=BD4A224496**

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