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 ?
For example, the Wisdom Tree Europe Hedged ETF recorded four consecutive yearly gains since 2012 with a cumulative gain of 57.55%.
A possible state of the world where both pay the same high price for jet fuel because jet fuel prices went up and neither airline hedged is ranked differently than a possible state of the world where your airline pays a high price for jet fuel because jet fuel prices went up and your airline did not hedge, but your unhedged rival pays less.
Panel B presents data on combinations of exposures hedged by FC (IR) hedgers.
In particular, all gains and losses on derivatives are recognized immediately in income while unrealized gains and losses on some hedged items would not under regular GAAP.
A hedge is "highly effective" only when the change in the fair value of the derivative substantially offsets the change in the fair value of the hedged item or cash flows attributable to the risk being hedged.
The firm finds its business disrupted if its hedged cash flows touch a lower bound.
It's a very circular series of events," he says, referring to the drive to consolidate pushing up servicing acquisition prices just as it also pushes up hedging prices, "one that ultimately might be very ugly." This also suggests that there are some structural and systemic risks in the industry that "can't be hedged out," says Harris.
The result of this calculation represents hedged cashflow.
For the 12 months ended March 31, the index, unhedged, lost 0.9%, but a hedged version of the index rose 17.1%.
A second response to this question is that a highly effective hedge substantially offsets risk associated with the change in the fair value (or the cash flow) of the hedged item.
[section] 1.988-5(d) extends integration treatment to hedged qualified payments in a manner similar to that afforded hedged executory contracts under Treas.
If you had hedged, you could have had a forward rate of 124.85, giving you a slight benefit because the yen is a premium currency.