Hedge

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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 ?
"The FASB is less concerned about how much work hedge accounting creates for corporate hedgers, than about the impact on users of corporate financial statements," she says.
The mean or median values of long-term debt for the hedgers are significantly higher than that of the nonhedgers in years -3, -2, and -1.
Xiong, "Why Do Hedgers Trade So Much?"NBER Working Paper No.
Hedgers' participation in India is very low compared to the rest of the world.
Experience shows that hedgers willing to assume the risk of the original hedger may not materialise in sufficient numbers or at all.
Hedgers and speculators act upon the same decision variable, that is, [E.sub.t][S.sub.t+1] relative to [[F.sup.t+1].sub.t].
Second, although a dollar is lost for every dollar gained in the futures markets, hedgers must be willing to allow others to profit in order to have a two-sided market.
Besides the problem in the Tobin's Q tests of including other hedgers in the sample of FC (IR) hedgers and thereby blurring the effect of the type of hedging being tested, debt capacity tests also include firms that might be hedging IR (FC) and/or commodity price exposure in the non-hedging sample.
FESTIVE FACES: The Honking Hedgers at a previous hospice Christmas concert
More fun too courtesy of the Honking Hedgers, the band of younger players which helps proves what a powerful interest there still is in getting fresh talent into the banding world.
The guests were entertained by Hade Edge Junior Brass Band's Honking Hedgers.
Alongside Hade Edge Band on stage will be the band's own youngsters from its junior band, the Honking Hedgers plus the vocal talent of Huddersfield Choral Society's Young Voices conducted by Susan Wilkinson.