Hedge


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Related to Hedge: hedge fund, hedge bets

Hedge

A transaction that reduces the risk of an investment.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Hedges don't just provide shelter for crops and livestock right beside the hedge; the protection from the elements works right out into the field.
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When the hedge accounting standard was originally initiated, FASB appeared quite concerned about the prospect of reporting entities using hedge accounting rules to misrepresent their earnings; to protect against this contingency, strict documentation requirements were stipulated.
Summary: The rising cost of currency hedges may require a rethink for fixed income portfolios
If you share a boundary hedge with a neighbour you're both responsible for its upkeep but you aren't allowed to clip poetry creative with topiary any part of the hedge that falls on your neighbour's side without permission.
"That has been relaxed, provided you've got a good hedge," he said, with all changes to the value of derivatives now to be posted under other comprehensive income, or OCI.
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Though the event exists ostensibly to raise funds for cancer research, its main attraction is the slate of hedge fund luminaries who descend every year to offer up their top investment ideas.
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