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 ?
Additionally, from the data for year 2012 it can also be concluded that Radiator Company's hedging strategy for currency was a better option than paying the monthly exchange rate.
The best hedging strategy in the presence of transaction costs.
Given that it is practically impossible to completely eliminate the risk in an option, can we determine a hedging strategy to minimize a chosen measure of risk under a real world price dynamics?
In order for a discrete hedging strategy using the underlying to be effective, hedging portfolios need to be rebalanced frequently.
Theoretical values of the option to be hedged (as well as standard options if used as hedging instruments) are computed based on the calibrated model and then either a delta hedging strategy or option hedging strategy is determined based on this risk adjusted valuation.
A hedging strategy must have been previously identified and documented by management (nature of the risk or risks being hedged, in accordance with the organization's risk management strategy; amounts and other characteristics of hedged and hedging positions; anticipated and designated period during which hedge accounting will be applied).
Cash flow hedges delay the recognition in net income of all gains and losses on both positions of the hedging strategy until the cash flows covered by the hedge have been realized.
In both cases, the technique consists in ensuring a match between offsetting gains and losses on hedging strategy positions in net income for the same periods.
The performance of each hedging strategy is evaluated at nonoverlapping one-month and three-month horizons.
This results in what is referred to as the "selective" hedging strategy.
The forward-rate adjusted returns associated with the selective hedging strategy, |Mathematical Expression Omitted~, are stated as
In light of recent scrutiny as to the application of hedge accounting, we are reviewing our accounting treatment of our derivative transactions related to our hedging strategy to ensure that our financial statements adhere to SFAS 133.