Hedge

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Hedge

A transaction that reduces the risk of an investment.

Hedge

To reduce the risk of an investment by making an offsetting investment. There are a large number of hedging strategies that one can use. To give an example, one may take a long position on a security and then sell short the same or a similar security. This means that one will profit (or at least avoid a loss) no matter which direction the security's price takes. Hedging may reduce risk, but it is important to note that it also reduces profit potential.

hedge

A security transaction that reduces the risk on an already existing investment position. An example is the purchase of a put option in order to offset at least partially the potential losses from owned stock. Although hedges reduce potential losses, they also tend to reduce potential profits. See also perfect hedge, risk hedge, short hedge, special arbitrage account.
Case Study A hedge that limits potential losses is also likely to limit potential gains. In May 1997 Georgia entrepreneur and billionaire Ted Turner entered into an arrangement whereby Mr. Turner had the right to sell four million of his Time Warner shares to a brokerage firm at a price of $19.815 per share. At the same time the brokerage firm acquired the right to buy the same four million shares at a price of $30.45. This particular hedge, called a collar, established a minimum and maximum value for four million shares of Time Warner owned by Mr. Turner. In other words, the former owner of the Atlanta Braves, Atlanta Hawks, CNN, and superstation WTBS acquired the right to obtain at least $19.815 per share by agreeing to give up any increase in value above $30.45. Time Warner stock subsequently skyrocketed when America Online acquired the firm at a price nearly triple the $30.45 stipulated in the agreement. Thus, the hedge ended up costing Mr. Turner approximately a quarter of a billion dollars. On a positive note, the four million shares represented less than 4% of Mr. Turner's total holdings of Time Warner stock he had acquired when the firm bought his Turner Broadcasting several years earlier.
References in periodicals archive ?
Since the instantaneous volatility is not directly observable, it is difficult to model instantaneous volatility risk and implement hedging strategies which adjust hedging positions according to this unobservable variable.
We evaluate relative performances of delta hedging and dynamic discrete risk minimization hedging strategies.
We analyze, in particular, the performance of hedging strategies under jump and volatility risks.
Most hedging strategies used in the financial industry are computed based on a risk adjusted option valuation.
As an alternative to quadratic risk measure, a piecewise linear measure is used in Coleman (in press), Coleman, Li, and Patron (2003), and Patron (2003) to compute discrete local and total risk minimization hedging strategies.
133; establish derivative hedging strategies for existing derivative instruments; and assess the system capabilities needed to adopt and support this standard.
Identifying the nature of the risk being hedged and using a hedging derivative consistent with an entity's established policy for risk management are essential components of hedging strategies and will permit auditors to verify the hedge transaction was conducted in accordance with management's strategy.
Application of the stochastic dominance methodology to the ex-post evaluation of foreign exchange hedging strategies requires that the decision-maker specify how the argument of his utility function (profits, returns, or revenues, among others) is affected by the use of the different hedging strategies.
Typically, a decision-maker must consider the use of two or more hedging strategies.
In this section, the stochastic dominance criteria are used to evaluate three possible hedging strategies for a hypothetical U.
For both the one-month and three-month horizons, the exporter considers three hedging strategies.
With that in mind, remember that a good hedging strategy is really an integrated approach to financial risk management that includes identifying risks, controlling the type and amount of hedging strategies and addressing the tax and accounting issues.