To calculate a 3-way hedge, multiply the initial investment by the difference between the current and future prices, then adjust based on whether the initial investment is less than or greater than the future price.
A 3 Way Hedge Calculator helps investors minimize potential losses or lock in profits across different bets or investments by hedging their positions in three outcomes. Hedging is commonly used in sports betting, financial markets, and arbitrage trading to reduce risk.
Formula:
3WH=P×(C−F)+(F−P)×(P≤F)+(P−M)×(P>M)P| Variable | Description |
|---|---|
| 3WH | 3-way hedge value (result of the calculation) |
| P | Price (current price of the asset) |
| C | Cost (target cost or price) |
| F | Floor price (minimum acceptable price) |
| M | Market price (reference or benchmark price) |
| (P≤F) | Indicator that is 1 if P is less than or equal to F, otherwise 0 |
| (P>M) | Indicator that is 1 if P is greater than M, otherwise 0 |
Example 1:
Given:
- Price P=100
- Cost C=120
- Floor price F=90
- Market price M=110
| Calculation | Instructions |
|---|---|
| P=100, C=120, F=90, M=110 | Start with the given values for price, cost, floor price, and market price. |
| (P≤F)=0 | Check if P≤F: 100 is not less than or equal to 90, so this is 0. |
| (P>M)=1 | Check if P>M: 100 is not greater than 110, so this is 0. |
| 3WH=100×(120−90)+(90−100)×0+(100−110)×0100 | Insert values into the formula and simplify. |
| 3WH=100×30+0+0100 | Since both indicators are 0, they don’t affect the result. |
| 3WH=3000100 | Perform the division. |
| 3WH=30 | The result is 30. |
Answer:
- The 3-way hedge value 3WH is 30.
Example 2:
Given:
- Price P=80
- Cost C=100
- Floor price F=85
- Market price M=75
| Calculation | Instructions |
|---|---|
| P=80, C=100, F=85, M=75 | Start with the given values for price, cost, floor price, and market price. |
| (P≤F)=1 | Check if P≤F: 80 is less than or equal to 85, so this is 1. |
| (P>M)=1 | Check if P>M: 80 is greater than 75, so this is 1. |
| 3WH=80×(100−85)+(85−80)×1+(80−75)×180 | Plug values into the formula and simplify. |
| 3WH=80×15+5+580 | Calculate each term: 80×15=1200, and sum them. |
| 3WH=1200+1080 | Perform the division. |
| 3WH=121080≈15.125 | The result is approximately 15.125. |
Answer:
- The 3-way hedge value 3WH is approximately 15.13.
What is 3 Way Hedge Calculator ?
A 3 Way Hedge Calculator is a valuable tool for traders and investors looking to manage risk in their portfolios. This calculator helps determine the optimal amounts to hedge in three different markets or instruments, providing a more comprehensive strategy for risk management. By using this calculator, you can find a balance that minimizes potential losses while maintaining your investment positions.
To use the calculator effectively, input the values of the three different instruments or assets you plan to hedge. The calculator will help you determine the necessary stakes for each asset, ensuring that you maintain a balanced approach to risk. This method is particularly useful in volatile markets where fluctuations can significantly impact your investments.
Understanding the hedge ratio is essential when using a 3 way hedge calculator. The hedge ratio represents the proportion of the position being hedged relative to the total investment. Knowing how to calculate this ratio will enhance your ability to create effective hedging strategies.
Final Words:
In addition to the 3 Way Hedge Calculator, you may find other related tools useful, such as arbitrage calculators and hedging calculators in Excel. These calculators can provide insights into various strategies and help you optimize your trading decisions. Whether you're managing risks in stocks, commodities, or currencies, a 3 way hedge calculator can enhance your investment strategies and protect your capital from potential downturns.
