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 ?
One of the challenges in interpreting the new accounting standards on hedges relates to the seemingly complex terminology used regarding financial instruments and the rules addressing hedges specifically.
Very often, these hedges too will be ancient in origin, with the trees that reside in them having been preserved into an unusually old age by many years of careful management.
Hedges had a very rewarding 35-year tenure as a university professor, from 1958 to 1993.
Hedge accounting is widely deemed to be the preferred treatment, as it allows for the economic motivation of hedges to be transparently reflected in reporting entities' financial statements.
Summary: The rising cost of currency hedges may require a rethink for fixed income portfolios
As we approach the end of August, it's a great time to give your evergreen hedges a final trim so you will have a fresh-looking but tidy hedge through the winter.
Hand-held sufficiently sharp will be fine for jobs and are my preferred option for require precision such as clipping However, bigger hedges will benefit some power tools.
accounting standard that makes it easier to account for hedges is likely to encourage more corporates to hedge.
A study of hedging using futures contracts is a study of the ways in which hedges can be constructed so that they perform as close to perfect as possible.
The first measures the risk that jet fuel prices will fall, a matter of concern to airlines that hedge against rising jet fuel prices, for when jet fuel prices fall, those airlines that have hedged lose money on their hedges.
Boundary hedges should always be on your side of the property, even when mature since neighbours have the right to cut any growth that encroaches.
In effect, this could mean that the hedges being implemented by the different areas of the company are offsetting one another and potentially increasing earnings risk for the company.