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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 MatchesHedged portfolioHedged portfolioA portfolio consisting of a long position in the stock and a long position in the put option on the stock, so as to be riskless and produce a return that equals the risk-free interest rate. Hedge qualityHedge qualityMeasured by the R-square in a regression of spot rate changes on futures price changes. Hedge ratioHedge ratioThe number of futures or options contracts required to hedge/counteract the exposure in the underlying instrument (for example shares, commodities etc). Aggressive Growth Hedge FundAggressive Growth Hedge FundIn the context of hedge funds, a style of management that focuses primarily on equities that are expected to have strong earnings growth. Perfect hedgePerfect hedgeA situation in which the profit and loss from the underlying asset and the hedge position are equal. Further SuggestionsHedged tenderCovered or hedge option strategies Delta cross hedge Short hedge Neutral hedge Additional hedge Commercial hedgers Buy hedge Currency hedge hedge funds Hedge wrapper Hedge clause Money market hedge Hedge fund Inflation hedge Delta hedge Sell hedge |
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