Hedging demands

Hedging demands

Demands for securities to hedge particular sources of consumption risk, beyond the usual mean-variance diversification motivation.
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Reports produced by companies such as ICIS Heren are extremely important to the wider market, as benchmark prices are based on these generated independent average prices and could cost or save companies millions of pounds when they buy or sell to meet hedging demands or to physically stock their energy requirements.
The spot market appreciation of the won sets off marked-to- market valuation changes on banks' balance sheets and possibly also expectations of further appreciation of the Korean won, which in turn further exacerbates the hedging demands of the non-banks.
In one respect, however, the hedging demand from the asset management sector was more sensitive to market conditions than for the export sector in Korea.
In particular, the desire to hedge changes in term premiums generates large hedging demands for long-term bonds.
Our finding of larger feedback effects during episodes of large changes in interest rates suggests that dealers' hedging demands might run up against more severe liquidity constraints if the volatility of rates were to rise sharply.
The ample liquidity of the markets for short-term interest rate products, where market turnover is large relative to hedging demands, makes them an unlikely site for any evidence of positive-feedback effects.
Treasuries were little changed in late trading Wednesday after prices were first beaten down by hedging demands and later turned higher when rate locks were unwound as another round of new corporate supply was priced, market sources said.
It introduces horizon effects, it allows market-timing strategies, and it introduces multiple factors via hedging demands (if expected returns vary over time, investors may want to hold assets that protect them against this risk).
Hedging demands address whether your overall allocation to stocks, or to specific portfolios, should be higher or lower as a result of return predictability, in order to protect you against reinvestment risk.
Lynch, New York University, "Portfolio Choice and Equity Characteristics: Characterizing the Hedging Demands Induced by Return Predictability"
Thus, we need consider only dealers' hedging demands.
Our estimate of dealers' hedging demands suggests that at shorter maturities the Eurodollar futures market is more than large enough to accommodate dealers' hedging--even when large interest rate shocks occur.