Prediction Markets for Hedging

Use prediction markets to hedge against real-world events. Protect your portfolio from political, economic, and market risks through event contracts.

Using Prediction Markets for Hedging

Prediction markets allow you to hedge against real-world events that could impact your portfolio, business, or personal finances. By taking positions opposite to your existing exposure, you can protect against adverse outcomes.

Common Hedging Use Cases

  • Political risk - Hedge against election outcomes that might affect specific industries or policies
  • Regulatory risk - Protect against unfavorable regulatory decisions
  • Crypto exposure - Hedge Bitcoin ETF approvals or regulatory actions
  • Business events - Protect against weather, natural disasters, or macro events
  • Career hedging - Hedge against industry-specific risks

Example: Hedging Political Risk

Scenario: You hold stocks in renewable energy companies that would decline if a particular candidate wins an election.

Hedge: Buy "Yes" shares on that candidate winning. If they win, your prediction market gains offset some of your stock losses. If they lose, your stocks do well and you only lose the premium paid for the hedge.

Sizing Your Hedge

  1. Calculate your exposure - Estimate potential losses from the adverse event
  2. Check current prices - See what probability the market assigns
  3. Determine coverage - Decide what percentage of losses you want to cover
  4. Size the position - Buy enough shares so payouts would cover your target

Formula: Hedge size = (Desired coverage × Probability) / (1 - Price)

Important Considerations

  • Hedges cost money (the premium you pay for the position)
  • Perfect hedges are rare - markets may not match your exact exposure
  • Consider liquidity - can you exit the hedge if needed?
  • Tax implications vary - consult a tax professional
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