There are many risks in the economy that agents could hedge. For example, house prices can go up or down, healthcare costs canchange, gas prices constantly change in fact, food prices,etc. They all change in somewhat unpredictable ways.

Therefore, you would think that most firms are exposed to some of these price shifts, but it doesn't seem like most of these firms are buying insurance or hedging against the risks. People also don't hedge. For example, a person that drives an hour to work should hedge gas price risk. Otherwise his net income after gas expenses is quite unpredictable!

So, my question is, why do you think most agents don't hedge most of their risks? Are the transaction costs too high? Are people not financially sophisticated enough? Are financial markets not developed enough? Maybe there's a business model where the local bank branch should sell this kind of insurance/hedging and after some education everybody would be using it!

We could all hedge all kinds of risks, which would actually make everybody else we trade with have more predictable incomes! In fact it makes sense to thing that the government aught to require any agents exposed to big risks to hedge themselves.! Anything wrong with my thinking? :)

  • $\begingroup$ I think part of the problem is getting someone to take the otherside of the hedge. Hedging gas prices, for example, is equivalent to buying future gas. You need someone who is going to sell you future gas. You could probably find someone, but they will probably charge quite a bit more than the predicted value, since they will be risk-averse too. $\endgroup$ – PyRulez Feb 10 at 1:02

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