Hedging: Difference between revisions
imported>Doug Williamson (Add example.) |
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1. | 1. ''Financial risk management - risk response.'' | ||
Traditionally, hedging referred to | 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. | For example, entering a foreign exchange forward contract to sell an expected future foreign currency receipt. | ||
Other techniques | 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. | Following such successful structuring, the organisation may then be said to be 'naturally' hedged. | ||
2. | 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. | 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. | ||
| Line 19: | Line 24: | ||
* [[Arbitrage]] | * [[Arbitrage]] | ||
* [[Authorisation]] | * [[Authorisation]] | ||
* [[Collar hedge]] | |||
* [[Correlation]] | |||
* [[Covering]] | * [[Covering]] | ||
* [[Deal contingent forward]] | * [[Deal contingent forward]] | ||
* [[Delta hedging]] | * [[Delta hedging]] | ||
* [[Derivative instrument]] | |||
* [[Diversification]] | |||
* [[Effective]] | * [[Effective]] | ||
* [[Financial instrument]] | * [[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]] | * [[Insurance]] | ||
* [[Interest rate guarantee]] | * [[Interest rate guarantee]] | ||
* [[Longevity hedge]] | |||
* [[Macro hedging]] | * [[Macro hedging]] | ||
* [[Mean deviation]] | |||
* [[Option]] | * [[Option]] | ||
* [[Outturn]] | * [[Outturn]] | ||
| Line 38: | Line 54: | ||
* [[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]] | *[[Media:2015_05_May_-_The_devil_is_in_the_detail.pdf| The devil is in the detail, 2015]] | ||
Latest revision as of 15:43, 4 August 2022
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
- Longevity hedge
- Macro hedging
- Mean deviation
- 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
