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HedgeTo offset risk. In the foreign exchange market, hedgers use the forward market to cover a transaction or open position and thereby reduce exchange risk. The term applies most commonly to trade.HedgeA strategy employed in the futures, options and warrants markets to reduce risk.Traditionally a commodity producer (say, a cocoa grower) would agree to sell his goods at a stated price at a stated time in the future, and the user of the commodity (say, a chocolate manufacturer) would agree to buy them. By agreeing on a price, quantity and delivery date, they introduce certainty into their operations and reduce risk. For the producer, the risk would be that prices drop, and for the processor that they would rise.The same strategy carries over into the financial markets. Options and warrants can be used to hedge a portfolio position. In the case where shares have been sold, for example, the purchase of equivalent call options (the option to buy shares) means that if the shares rise in price, a corresponding rise in the value of the option will offset the notional loss expected on the underlying shares.HedgeA transaction that reduces the risk of an investment.Hedge Similar MatchesMoney market hedgeMoney market hedgeThe use of borrowing and lending transactions in foreign currencies to lock in the home currency value of a foreign currency transaction. Covered or hedge option strategiesCovered or hedge option strategiesStrategies that involve a position in an option as well as a position in the underlying stock, designed so that one position will help offset any unfavorable price movement in the other, including covered call writing and protective put buying. Related: Naked strategies Commercial hedgersCommercial hedgersCompanies that take futures positions in commodities so that they can guarantee prices at which they will buy raw materials or sell their products. Delta cross hedgeDelta cross hedgeA futures hedge that has both maturity and currency mismatches with an underlying exposure. Hedge clauseHedge clauseA clause in a research report or any published document, that attempts to absolve the writer of responsibility for the accuracy of information provided. Further SuggestionsHedged portfolioHedge quality Hedge fund Hedge wrapper Buy hedge Short hedge Inflation hedge Neutral hedge Additional hedge Delta hedge Currency hedge Perfect hedge Aggressive Growth Hedge Fund hedge funds Hedged tender Sell hedge hedge ratio |
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