Hedging: Difference between revisions
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1. | 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. | |||
The application of hedging | |||
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]] | ||
* [[ | * [[Collar hedge]] | ||
* [[ | * [[Correlation]] | ||
* [[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]] | * [[Guide to risk management]] | ||
* [[Hedge accounting]] | * [[Hedge accounting]] | ||
* [[Hedge effectiveness]] | |||
* [[Hedge fund]] | * [[Hedge fund]] | ||
* [[ | * [[Hedge ratio]] | ||
* [[Insurance]] | |||
* [[Interest rate guarantee]] | * [[Interest rate guarantee]] | ||
* [[Longevity]] | * [[Layered hedging]] | ||
* [[Longevity hedge]] | |||
* [[Macro hedging]] | * [[Macro hedging]] | ||
* [[ | * [[Mean deviation]] | ||
* [[Natural hedge]] | |||
* [[Option]] | * [[Option]] | ||
* [[Outturn]] | * [[Outturn]] | ||
* [[Overhedging]] | * [[Overhedging]] | ||
* [[Pre-hedging]] | |||
* [[Pre-settlement risk]] | * [[Pre-settlement risk]] | ||
* [[Reduce]] | * [[Reduce]] | ||
* [[Risk identification]] | |||
* [[Risk response]] | * [[Risk response]] | ||
* [[Speculation]] | * [[Speculation]] | ||
* [[Standard deviation]] | |||
* [[Transfer]] | * [[Transfer]] | ||
* [[Uncovered]] | * [[Uncovered]] | ||
* [[Underhedging]] | * [[Underhedging]] | ||
* [[Value at risk]] | |||
* [[Variability]] | |||
* [[Volatility]] | |||
* [[Warehousing]] | * [[Warehousing]] | ||
== | ==Treasurer articles== | ||
*[ | *[[Media:2015_05_May_-_The_devil_is_in_the_detail.pdf| The devil is in the detail, 2015]] | ||
*[http://www.treasurers.org/node/ | *[http://www.treasurers.org/node/8925 Harness your hedges, April 2013] | ||
*[http://www.treasurers.org/node/689 Interest rate hedging: demand the proof | *[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
- Arbitrage
- Authorisation
- Collar hedge
- Correlation
- Covering
- Deal contingent forward
- Delta hedging
- Derivative instrument
- Diversification
- Effective
- Financial instrument
- Foreign exchange forward contract
- Forward contract
- Forward market
- Forward rate agreement
- Futures contract
- Guide to risk management
- Hedge accounting
- Hedge effectiveness
- Hedge fund
- Hedge ratio
- Insurance
- Interest rate guarantee
- Layered hedging
- Longevity hedge
- Macro hedging
- Mean deviation
- Natural hedge
- Option
- Outturn
- Overhedging
- Pre-hedging
- Pre-settlement risk
- Reduce
- Risk identification
- Risk response
- Speculation
- Standard deviation
- Transfer
- Uncovered
- Underhedging
- Value at risk
- Variability
- Volatility
- Warehousing
