Hedging: Difference between revisions

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1. ''Financial risk management - risk response.''


Traditionally hedging refers to the process whereby a firm uses financial instruments (such as forward contracts, futures contracts or options) or other techniques to reduce the impact of fluctuations in such factors as the market price of credit, foreign exchange rates, or commodity prices on its profits or corporate value.
Hedging is a risk management technique that generally involves adding an opposite exposure to an existing risk, in the expectation that variations in the two items will cancel out - in whole or in part - to reduce the net variability in the overall hedged position.


Traditionally, hedging referred to using derivative financial instruments (such as forward contracts, futures contracts or options) or other techniques to reduce the impact of fluctuations in such factors as the market price of credit, foreign exchange rates, or commodity prices on its profits or corporate value.


2.
For example, entering a foreign exchange forward contract to sell an expected future foreign currency receipt.


The application of hedging techniques has been extended to the management of many other risks including for example inflation and longevity risk arising in pension funds.
 
Other techniques include operational or structural responses, for example re-locating manufacturing or assembly to align the currencies of costs with revenues.
 
Following such successful structuring, the organisation may then be said to be 'naturally' hedged.
 
 
Another form of hedging is diversification.
 
 
2. ''Risk management.''
 
The application of hedging techniques was then extended to the management of many other risks including, for example, inflation and longevity risk arising in pension funds.




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* [[Arbitrage]]
* [[Arbitrage]]
* [[Authorisation]]
* [[Authorisation]]
* [[Authority limits]]
* [[Collar hedge]]
* [[Basis risk]]
* [[Correlation]]
* [[Buy-side firm]]
* [[CertFMM]]
* [[Covering]]
* [[Covering]]
* [[Deal contingent forward]]
* [[Delta hedging]]
* [[Delta hedging]]
* [[Derivative instrument]]
* [[Diversification]]
* [[Effective]]
* [[Effective]]
* [[Financial instrument]]
* [[Foreign exchange forward contract]]
* [[Foreign exchange forward contract]]
* [[Futures]]
* [[Forward contract]]
* [[Forward market]]
* [[Forward rate agreement]]
* [[Futures contract]]
* [[Guide to risk management]]
* [[Hedge accounting]]
* [[Hedge accounting]]
* [[Inflation risk]]
* [[Hedge effectiveness]]
* [[Hedge fund]]
* [[Hedge ratio]]
* [[Insurance]]
* [[Interest rate guarantee]]
* [[Interest rate guarantee]]
* [[Longevity]]
* [[Layered hedging]]
* [[Longevity hedge]]
* [[Macro hedging]]
* [[Macro hedging]]
* [[MCT]]
* [[Mean deviation]]
* [[Natural hedge]]
* [[Option]]
* [[Option]]
* [[Outturn]]
* [[Outturn]]
* [[Overhedging]]
* [[Overhedging]]
* [[Pre-hedging]]
* [[Pre-settlement risk]]
* [[Pre-settlement risk]]
* [[Guide to risk management]]
* [[Reduce]]
* [[Sell-side firm]]
* [[Risk identification]]
* [[Risk response]]
* [[Speculation]]
* [[Speculation]]
* [[Standard deviation]]
* [[Transfer]]
* [[Uncovered]]
* [[Uncovered]]
* [[Underhedging]]
* [[Underhedging]]
* [[Value at risk]]
* [[Variability]]
* [[Volatility]]
* [[Warehousing]]
* [[Warehousing]]




===Other links===
==Treasurer articles==
 
*[[Media:2015_05_May_-_The_devil_is_in_the_detail.pdf| The devil is in the detail, The Treasurer, 2015]]


*[http://www.treasurers.org/node/8925 Harness your hedges, The Treasurer, April 2013]
*[[Media:2015_05_May_-_The_devil_is_in_the_detail.pdf| The devil is in the detail, 2015]]


*[http://www.treasurers.org/node/4592 Falling foul of currency hedging, John Grout, ACT 2009]
*[http://www.treasurers.org/node/8925 Harness your hedges, April 2013]


*[http://www.treasurers.org/node/689 Interest rate hedging: demand the proof, The Treasurer, 2008]
*[http://www.treasurers.org/node/689 Interest rate hedging: demand the proof, 2008]


[[Category:Manage_risks]]
[[Category:Manage_risks]]
[[Category:Risk_frameworks]]
[[Category:Risk_frameworks]]

Latest revision as of 18:24, 29 August 2024

1. Financial risk management - risk response.

Hedging is a risk management technique that generally involves adding an opposite exposure to an existing risk, in the expectation that variations in the two items will cancel out - in whole or in part - to reduce the net variability in the overall hedged position.

Traditionally, hedging referred to using derivative financial instruments (such as forward contracts, futures contracts or options) or other techniques to reduce the impact of fluctuations in such factors as the market price of credit, foreign exchange rates, or commodity prices on its profits or corporate value.

For example, entering a foreign exchange forward contract to sell an expected future foreign currency receipt.


Other techniques include operational or structural responses, for example re-locating manufacturing or assembly to align the currencies of costs with revenues.

Following such successful structuring, the organisation may then be said to be 'naturally' hedged.


Another form of hedging is diversification.


2. Risk management.

The application of hedging techniques was then extended to the management of many other risks including, for example, inflation and longevity risk arising in pension funds.


See also


Treasurer articles