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 classic literature ?
At the same moment, and long before the vibration had touched the less-experienced English ears, Montano the brigand ran up the bank above them and stood in the broken hedge, steadying himself against a tree and peering down the road.
Fifteen shillings a week," she repeated, coming out on the other side of the hedge, and running her fingers through her hair to rid herself of a bramble which had attached itself to her.
Presently the party, in full cry after an old blackbird (who was evidently used to the thing and enjoyed the fun, for he would wait till they came close to him, and then fly on for forty yards or so, and, with an impudent flicker of his tail, dart into the depths of the quickset), came beating down a high double hedge, two on each side.
One day he was at this game, and did not know that the master was in the next field; but he was there, watching what was going on; over the hedge he jumped in a snap, and catching Dick by the arm, he gave him such a box on the ear as made him roar with the pain and surprise.
D'Artagnan leaned against the hedge, after having cast a glance behind it.
He reached the hedge and hid himself behind it; in passing by the house where the scene which we have related took place, he remarked that the window was again lighted up and he was convinced that Aramis had not yet returned to his own apartment and that when he did it would not be alone.
They were walking, the executioner before them, whilst fifty archers formed a hedge on their right and their left.
I turned back and drew Penfentenyou into the side of the flanking hedge.
I understand that the yew hedge is penetrated at one point by a gate?
Only our feeble hedge separated us from this horror of the night.
The little party of strangers now followed the Prince across a few more of the glass bridges and along several paths until they came to a garden enclosed by a high hedge.
Accordingly I picked up the first large stone I could find in the road, crossed a common, burst through a hedge, and came to a halt, on the other side, in a thick wood.