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 ?
The identification of the hedged item should describe the transaction creating the risk being hedged and the type of risk that the transaction creates.
Without proper documentation or hedge designation, an entity could retroactively identify a hedged item, a hedged transaction or a method of measuring effectiveness to achieve desired accounting results.
TEI recognizes that the hedging of income streams may require special rules to produce a matching of the hedged item and the hedge position, particularly where there is an early disposition of the underlying capital asset producing the hedged income stream.
9) Thus, the IRS has reversed its position, taken in FNMA, that hedging transactions related to borrowings cannot be ordinary because a liability, rather than an asset, is being hedged.
In such case, intercompany hedges can qualify as hedging transactions, provided the position of the member whose risk is being hedged would qualify as a hedging transaction if that member entered into the same transaction with an unrelated party and the position of the other member to the hedging transaction is marked to market under that member's accounting method.
The SFAS 52 risk test evaluates risk created by the hedged transaction only.
This identification must specify both the hedging transaction and the item being hedged.
For example, it's generally agreed that hedge accounting should be permitted for hedges of existing assets, liabilities, or firm commitments, given the existence of a clear economic relationship between the hedging instrument and the item being hedged, and a reasonable expectation at the hedge's inception of high inverse correlation.
Potential pitfalls under the current maze of tax rules addressing foreign currency transactions relate primarily to mismatches in the timing and/or character of income or loss between the foreign currency hedge and the purchase order or payable being hedged.
In hedge accounting, realized and unrealized gains or losses on the hedging instrument are deferred and recognized in the same period as the transactions being hedged.
Nasdaq:ATLS) (the "Company") announces that it has hedged 1.
Currently, the deferral method is used in practice: You recognize losses or gains on the hedging instrument at the same time you recognize gains or losses on the hedged item.