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Traders hedge to reduce their risk. However, wouldn't reducing the position achieve the same results while keeping the risk management process simpler? At least, one need not worry about making the wrong hedging calculations.

What are the pros and cons of each approach?

curious
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You may not be able to reduce a position. Either because there is no liquid markets (for exotic and less transparent derivatives markets) or your position is to big to reduce at once (if you take on big positions versus an institutional client (e.g., pension fund) you may not be able to go to the market to reduce it all).

Plus, the whole point of trading is to (facilitate clients and) make money. Reducing positions is less profitable than trading it out in general.

luckylwk
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  • Good answer. However, for retail investors, it may be better to simply reduce the position size, particularly if their position is small and the market (usually equity) is liquid enough for their tiny position. – curious Oct 06 '13 at 10:42