> For the complete documentation index, see [llms.txt](https://docs.vigilan.market/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.vigilan.market/hedging/building-a-hedge.md).

# Building a Hedge

The examples in this section explain contract mechanics. Prices and outcomes are hypothetical, not live offers. They exclude fees and other costs unless stated. USDT-denominated calculations assume a stable unit of account for illustration.

### Start with the loss scenario

1. Identify the position and the specific adverse event.
2. Estimate the loss you want to offset in that scenario.
3. Find a market whose instrument, trigger, and dates match it.
4. Select the outcome that would pay in the adverse scenario.
5. Compare the purchase cost with the **net offset** if the hedge pays.
6. Examine scenarios where the underlying records a loss but the hedge does not pay.

### Choosing Yes or No

| Market question                                   | Concern                              | Possible hedge side |
| ------------------------------------------------- | ------------------------------------ | ------------------- |
| Will the asset fall below the specified level?    | A decline in a held asset            | Yes                 |
| Will the asset stay within the specified range?   | A range break                        | No                  |
| Will the announced listing occur by the deadline? | Losses if the listing does not occur | No                  |

The relationship between the event and your loss can still be imperfect. The side is determined by the question, not by a universal rule that Yes means protection.

### Gross payout versus net offset

Suppose you want a gross payout of **G** USDT. At 1 USDT per payout-eligible share, you need **G** shares before quantity constraints. At price **p**, they cost **G × p**. Their net contribution when eligible for payout is **G × (1 − p)** before other costs.

If instead you want to offset a loss of **L** USDT **after paying for the hedge**, the simplified share count is:

**Required shares = L ÷ (1 − p)**

Round up to a permitted order quantity and account for execution prices and costs. This arithmetic applies only when the purchased outcome is confirmed. It is not a guarantee that all losses are covered.

### Example A: Price-decline hedge

You hold an asset position worth 10,000 USDT. You want to reduce the effect of a defined downside scenario using Yes shares in a market that pays if the specified price condition occurs.

You buy 2,000 Yes shares at 0.20 USDT. The hedge costs 400 USDT and pays 2,000 USDT if the market resolves Yes.

| Scenario at the end of the example period  | Underlying P\&L | Gross hedge payout | Hedge cost | Combined P\&L |
| ------------------------------------------ | --------------- | ------------------ | ---------- | ------------- |
| Trigger met; underlying return is −20%     | −2,000          | +2,000             | −400       | **−400**      |
| Trigger not met; underlying return is −10% | −1,000          | 0                  | −400       | **−1,400**    |
| Trigger not met; asset unchanged           | 0               | 0                  | −400       | **−400**      |
| Trigger not met; asset gains 10%           | +1,000          | 0                  | −400       | **+600**      |

All figures are USDT. The market rules determine whether the trigger is met; the percentage move alone is not a substitute for those rules.

The first row shows a 2,000 USDT payout but only a 1,600 USDT net offset. At the same price, 2,500 shares would cost 500 USDT and contribute a net 2,000 USDT if the market resolved Yes.

### Example B: Range-break hedge

An LP buys 1,000 Yes shares at 0.10 USDT in a hypothetical contract that resolves Yes if the specified price spends at least 10% of a 24-hour window outside a ±3% reference band.

The cost is 100 USDT. If the market resolves Yes, the position pays 1,000 USDT, producing a net hedge contribution of 900 USDT before other costs.

| Observed condition under the contract's measurement rules | Resolution | Hedge P\&L |
| --------------------------------------------------------- | ---------- | ---------- |
| Outside the band for 12% of the window                    | Yes        | +900 USDT  |
| Outside the band for 5% of the window                     | No         | −100 USDT  |
| Never outside the band                                    | No         | −100 USDT  |

Ten percent of a full 24-hour window is 2 hours 24 minutes. A sampled market still follows its specified sampling rules rather than an assumed continuous calculation.

The LP can incur a loss in the second row even though the hedge position receives no payout. The LP's own range may also differ from the market's reference band. Neither a range-break contract nor a fixed payout automatically reimburses actual impermanent loss.

### Example C: Funding-cost hedge

A perpetual trader buys 500 Yes shares at 0.10 USDT in a hypothetical funding-stress market. The hedge costs 50 USDT and contributes 450 USDT net if its trigger is met.

If the trader incurs 300 USDT of funding costs and the hedge pays, the combined funding-and-hedge result is +150 USDT before other costs. If funding costs are 300 USDT but the contract's trigger is never met, that result is −350 USDT.

This example excludes the perpetual's price P\&L. A funding hedge does not automatically offset price losses or liquidation risk.

### Basis risk

Basis risk is the mismatch between the contract and your real exposure. It can come from a different asset, venue, threshold, time window, settlement currency, loss amount, or payment timing.

Ask two questions before entering a hedge: **When could I experience downside and receive no payout? When could this contract pay even though my underlying position has not recorded a loss?** Those scenarios help show what the hedge actually covers.