On this page (6 sections)
Content reviewed: 2026-10-13. Examples are hypothetical.
A hedge uses one position to offset losses elsewhere. Prediction contracts can sometimes provide a targeted payout, but they do not automatically reproduce the protection of an insurance policy. The contract must pay under circumstances closely related to the loss you want to offset.
Define the loss before selecting the market
Write the financial exposure in ordinary units: a potential extra expense, reduced revenue or another measurable loss. Specify when it occurs and which conditions cause it. Then compare that event with the contract's rules.[2]
For weather, location and measurement are especially important. Kalshi names specific settlement sources for its weather products.[1] A contract about one city's recorded temperature might be a poor hedge for your business's actual revenue, even if the two usually move together.
Calculate net protection
Consider a hypothetical expense that increases by $1,000 when event X occurs. A Yes contract on exactly X costs $0.25 and pays $1 when X occurs, with no fees in this example.
Buying 1,000 contracts costs $250. If X occurs, the $1,000 payout offsets the extra expense, but the hedge itself still cost $250. If X does not occur, there is no extra expense and the $250 stake is lost.
To offset the $1,000 loss after accounting for the hedge's cost in the adverse state, the algebra is quantity × (1 - 0.25) = 1,000, or about 1,333.33 contracts before rounding and fees. That larger hedge also costs more when the adverse event does not occur. Choose the protection level based on the full two-state budget rather than only the headline payout.
Identify basis risk
Basis risk is the gap between what harms you and what triggers payment. The relevant mismatch can involve location, timing, threshold, source or the size of the actual loss. Add a scenario where your real loss occurs but the contract settles No. If that scenario is plausible, the hedge is incomplete.
Also consider payout timing. A contract that pays after a bill is due does not solve the immediate cash problem. Keep accessible funds for obligations rather than counting a possible future settlement as current cash.
Compare alternatives
Holding cash, reducing the underlying exposure or obtaining suitable insurance may fit the need better. Portfolio allocation depends on time horizon and ability to bear loss.[3] A prediction contract adds its own operational and settlement risks, so compare the complete arrangement.
Keep this hedge separate from speculative positions in your ledger. Increasing it because the market price looks attractive changes the objective from covering a loss to taking an additional view. Recalculate the hedge if the underlying exposure shrinks or disappears.
Try the calculation
The hedge calculator models a different, narrower case: equal quantities of complementary Yes and No contracts. Its starting example buys $100 of Yes at 40 cents and adds No at 30 cents. Before fees, 250 pairs cost $175 and pay $250 under either normal settlement outcome. It does not model the size or basis risk of a real-world exposure.
References
- Kalshi Help Center. Weather Markets. Accessed October 13, 2026.
- Kalshi Help Center. Market Rules. March 17, 2026; accessed October 13, 2026.
- U.S. Securities and Exchange Commission, Investor.gov. Asset Allocation and Diversification. Accessed October 13, 2026.