>What is a brief definition of "leveraged" ?
>and "hedge" ?
I thought maybe my answer would be of more general interest (and I've added a little):
1. "leveraged" means that you buy an asset, like a stock or whatever, using borrowed money.
This helps give you a big return:
zero leveraging: if you buy a stock at $100 of your own money and it goes up to $110 in a year, you get a return of 10%. (rate of return = (sale price of asset - amount you have to pay)/amount invested = (110-100)/100 in this case.)
some leveraging: if you borrow $50 at 5% interest and use $50 of your own to buy the asset, then you still get the $110. After you subtract the principle and interest on the loan ($50 + 0.05*$50 = $52.5) and the amount you invested ($50), your profit is $110 - $102.5 = $7.5. So your rate of return = $7.5/$50 = 15%.
even more leveraging: if you borrow $90, the rate of return is ($110 - ($90 + 0.05*$90 + $10))/$10 = 55%.
The more the leveraging, the more the risk, however. If the price turns out to be $100 (instead of $110), then your return is 0% in the first case, -5% in the second, and -45% in the third. The second -- and especially the third -- means that you may not be able to live up to your debt obligation, which leads to bankruptcy.
2. "Hedging" refers to diversification in order to minimize risk in the future. (It's also a poker term, with pretty much the same meaning.) A farmer sometimes "hedges" by signing a contract with someone to pay a fixed price for some of his product in the future. This "locks in" the price, so that the farmer doesn't suffer in a big way from price declines. Locking in the price of half of her crop at $10 per bushel, if the market price falls to $5, the average price is $7.50. On the other hand, hedging means you don't take advantage of price rises: if the market price rises to $15, the average price would be $12.50. Hedging is like buying insurance: you don't suffer as much from price fluctuations, but you suffer a cost. (Options make this more complicated, so let's ignore them.)
Hedging is often seen as the opposite of speculation, which involves _seeking_ risk in order to get a high return.
btw, how 'bout those Cubs?!? I expect to see pigs flying soon.
one of those hated academics,
Jim Devine jdevine at popmail.lmu.edu & http://clawww.lmu.edu/Departments/ECON/jdevine.html