Locking a profit by hedging after the odds move
Earlier you backed outcome of a two-outcome event, staking $100 at decimal odds of (so you collect $300 if occurs, and lose your $100 otherwise). The market has since moved, and you can now back not- at decimal odds of . You want to hedge so your net profit is the same whichever outcome happens — a locked profit. How many dollars should you now stake on not-, and what is your guaranteed profit? Give the guaranteed profit (in dollars).
Show hints (2)+
- Write the net profit on each outcome as a function of the hedge stake (total out is ), then set the two equal.
- Solving gives ; plug back in for the locked profit.
Answer
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50
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Asked at: Optiver, IMC, Akuna Capital, Flow Traders