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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 MatchesDelta cross hedgeDelta cross hedgeA futures hedge that has both maturity and currency mismatches with an underlying exposure. Currency hedgeCurrency hedgeApplies mainly to international equities. Hedging technique to guard against foreign exchange fluctuations (i.e., short Euro l00 mm when holding a long position of Euro l00 mm in stocks). Hedged tenderHedged tenderAn investor sells a portion of a stock holding short a tender offer in the event all shares tendered are not accepted. For example, investor Q has 5000 shares of XYZ. An acquiring company makes a tender offer of $100 a share when the shares are currently worth $80. Investor Q short-sells 2500 shares after the announcement and the price of the stock has approached $100. Company XYZ purchases only 2500 of the original shares at $100. Investor Q has sold all shares at $100 even as the price of the stock drops on a post-news dip. Buy hedgeBuy hedgeSee: Long hedge Hedge fundsHedge fundsA fund which is managed 'aggressively' to get maximum rates of returns by using derivatives and swaps, selling short, and using arbitrage techniques. Because of the high risk, investors in hedge funds have traditionally been drawn from the ranks of institutional investors who have well diversified portfolios and can afford to take on the extra risk. The rewards of hedge fund managers are usually heavily geared towards the performance of their funds. Further SuggestionsAdditional hedgeMoney market hedge Delta hedge Hedge clause Hedge fund Hedge wrapper Hedged portfolio Commercial hedgers Aggressive Growth Hedge Fund Inflation hedge hedge ratio Short hedge Perfect hedge Sell hedge Covered or hedge option strategies Neutral hedge Hedge quality |
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