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Topic: Hedging


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  Hedging - Wikipedia, the free encyclopedia
Hedging is a strategy, usually through some form of transaction, designed to minimise exposure to an unwanted business risk.
Hedging consists of selling off the unwanted risk to those (such as those who have computed the actuarial value of fire risk) who have the ability or desire to take it.
One of the oldest means of hedging against risk is the purchase of protection against accidental loss or damage to property, or injury, loss of life.
en.wikipedia.org /wiki/Hedging   (490 words)

  
 hedging. The Columbia Encyclopedia, Sixth Edition. 2001-05
It is generally used by traders on the commodities market.
Typically, hedging involves a trader contracting to buy or sell one particular good at the time of the contract and also to buy or sell the same (or similar) commodity at a later date.
Hedging is also employed by stock and bond traders, export-import traders, and some manufacturers.
www.bartleby.com /65/he/hedging.html   (280 words)

  
 cross-hedging Definition
Hedging one instrument's risk with a different by taking a position is a related derivatives contract.
Additionally, the credit quality of the derivative and the instrument being hedged needs to be similar and their markets need to be of similar liquidity, so that price changes are similar.
Lastly, the maturity of the derivatives contract must be at least as long as the maturity of the desired hedge, otherwise the investor will be left with an unhedged exposure for a period of time.
www.investorwords.com /1221/cross_hedging.html   (303 words)

  
 Hedging as supplied by EagleTraders.com
Hedging is the process of protecting one transaction by means of another, and in the commodity markets takes the form of selling a FUTURES contract in an amount equivalent to necessary cash purchases.
Thus a person who hedges is in a neutral position: he is committed to both "long" and "short" contracts for an equal amount.
Or, similarly, a hedge against a possible market decline, may be accomplished by the purchase of a put, entitling the holder to sell 100 shares of U.S. Steel at 25 to the maker of such put for a specified period of time.
www.eagletraders.com /advice/securities/hedging.htm   (986 words)

  
 About Hedge Funds - What is a Hedge Fund?   (Site not responding. Last check: 2007-10-05)
A macro hedge fund is more volatile but potentially faster growing than a distressed-securities hedge fund that buys the equity or debt of companies about to enter or exit financial distress.
An equity hedge fund may be global or country specific, hedging against downturns in equity markets by shorting overvalued stocks or stock indexes.
Hedge funds utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets.
www.magnum.com /hedgefunds/abouthedgefunds.asp   (2412 words)

  
 About Hedge Funds - Synopsis of Hedge Fund Strategies   (Site not responding. Last check: 2007-10-05)
Hedge funds are flexible in their investment options (can use short selling, leverage, derivatives such as puts, calls, options, futures, etc.).
Performance of many hedge fund strategies, particularly relative value strategies, is not dependent on the direction of the bond or equity markets -- unlike conventional equity or mutual funds (unit trusts), which are generally 100% exposed to market risk.
Investing in hedge funds tends to be favored by more sophisticated investors, including many Swiss and other private banks, who have lived through, and understand the consequences of, major stock market corrections.
www.magnum.com /hedgefunds/strategies.asp   (1445 words)

  
 FMN Online: Financial Accounting & Reporting
Symmetrical hedge strategies are designed to "lock in" a company's returns while asymmetrical hedge strategies can be analogized to insurance, where the hedge acts as protection against losses.
A simple example of this type of natural hedge would be an investment in a 1 year U.S. Treasury note as a hedge of a 1 year certificate of deposit liability.
If the certificates of deposit were not hedged, the financial institution would be exposed to the risk of changes in rates; it is obligated to pay a fixed rate to the holders of the certificates of deposits.
www.fmnonline.com /publishing/article.cfm?article_id=566   (1155 words)

  
 Hedging Your Bets: A Heads Up on Hedge Funds and Funds of Hedge Funds
Funds of hedge funds and hedge funds may invest in highly illiquid securities that may be difficult to value.
Hedge funds typically charge an asset management fee of 1-2% of assets, plus a "performance fee" of 20% of a hedge fund's profits.
Hedge fund investors do not receive all of the federal and state law protections that commonly apply to most registered investments.
www.sec.gov /answers/hedge.htm   (1161 words)

  
 Invest FAQ:Strategy:Hedging
Hedging is a way of reducing some of the risk involved in holding an investment.
In my opinion, the best (and cheapest) hedge is to sell short the stock of a competitor to the company whose stock you hold.
The efficiency of the hedge is strongly dependent on your estimate of the correlation between your high-beta portfolio and the broad market index.
invest-faq.com /articles/strat-hedging.html   (448 words)

  
 Giddy: The Corporate Hedging Process
Corporate risk managers who wish to use hedging techniques to improve their company's risk profile must educate their board of directors about the risks the company is naturally exposed to when it does not hedge.
A clearly defined hedging policy helps to ensure that top management and the company's board of directors are aware of the hedging activities used by the corporation's risk managers and that all risks are properly accounted for and managed.
Hedging frees up resources and allows management to focus on the aspects of the business in which it has a competitive advantage by minimizing the risks that are not central to the basic business.
www.stern.nyu.edu /~igiddy/corphdg.htm   (1589 words)

  
 Hedging
By hedging, in the general sense, we can imagine the company entering into a transaction whose sensitivity to movements in financial prices offsets the sensitivity of their core business to such changes.
Hedging objectives vary widely from firm to firm, even though it appears to be a fairly standard problem, on the face of it.
Hedging is about making the best possible decision, integrating the firm's level of sophistication, systems and the preferences of their shareholders.
www.finpipe.com /hedge.htm   (2124 words)

  
 Options Calculator and Database - Agricultural Risk Management with Options   (Site not responding. Last check: 2007-10-05)
If a hedger decides to minimize price risk by hedging with options, the first question to consider is what strike price (the strike price is the price at which the underlying futures contract can be bought in the case of a call, or sold in the case of a put).
Fortunately however CFP hedged its cash position, and is able to sell the 3100 September futures contracts it bought in May at $2.55 per bushel, for a gain of $0.20 per bushel in the futures market.
However, since CFP hedged, it nets $2.60 per bushel which it locked in as a price ceiling in May. The final cash price is calculated by adding the August 15th cash price ($2.70), plus the initial premium paid out for the option ($0.20), less the liquidated value received for the option ($0.30).
www.agribiz.com /cfor/mae/maedoc.html   (3841 words)

  
 Consistent Approach to Measuring Hedge Effectiveness by Bernard Lee
Furthermore, the fact that a hedge and its hedged portfolio may be highly correlated statistically does not necessarily immunize the portfolio from unexpected large PV fluctuations that the Statements intend hedging entities to recognize in earnings.
If the hedged transaction is a one-off transaction, such as the sale/purchase of commodities, the deferred amount in OCI reverts into earnings in the same period as when the forecasted sale/purchase physically occurs.
If the hedged transaction is an on-going transaction, such as the floating interest-rate payment coupon on a bond issued by the hedging entity, the "proportional" deferred amount in OCI reverts into earnings in the same period when the interest expense associated with each particular coupon is recognized.
www.fenews.com /fen14/hedge.html   (4144 words)

  
 FMN Online: Financial Accounting & Reporting
This is the last in a series of three articles that are intended as an introduction to hedging and the use of derivatives.
In the second, we looked at the commonly hedged risks and the most common types of derivatives used as hedging instruments.
Under the "treasury lock", the company will be compensated by the counterparty should the reference rate rise from the date of the "treasury lock" transaction through the date of the anticipated debt issuance and will compensate the counterparty to the extent that the reference rate falls.
www.fmnonline.com /publishing/article.cfm?article_id=568   (1111 words)

  
 Journal of Accountancy: The decision on derivatives - accounting standards for derivative instruments and hedging ...   (Site not responding. Last check: 2007-10-05)
It may be costly for some entities to implement Statement no. 133 because of the major changes to hedge accounting that add complexity and may require companies to make significant modifications to their management information systems.
The gain or loss on the hedged item is the amount that perfectly offsets the derivative loss or gain, adjusted for identified hedge ineffectiveness, if any, so that a company's earnings reflect identified hedge ineffectiveness for the risk being hedged.
To hedge this fair value exposure, on January 1, 1999, Company X simultaneously enters into a three-year, interest rate swap on a $1 million notional amount.
www.findarticles.com /m6280/1998_Nov/53268733/p1/article.jhtml   (1432 words)

  
 Bob Jensen's SFAS 133 GlossaryAccounting for Derivative Instruments and Hedging Activities
Changes in the fair value of derivatives used to hedge depend on whether the derivative is a fair-value hedge or an expected cash flow hedge, and on the degree of effectiveness of the hedge.
Derivative gains and losses for hedges of forecasted transactions and firm commitments are deferred as liabilities or assets on the balance sheet under FAS 52 and FAS 80.
Hedge accounting is prohibited for a hedge of a portfolio of dissimilar items, and strict requirements exist for hedging a portfolio of "similar" items.
www.trinity.edu /rjensen/acct5341/speakers/133glosf.htm   (10643 words)

  
 The CPA Journal
The shortcut method does not apply, however, to a hedging strategy that designates the benchmark interest rate as the hedged risk when the hedged item is stated at a different index, such as the prime rate.
Hedge effectiveness will increase because changes in credit spreads will not be considered a source of ineffectiveness if hedging with a benchmark interest rate.
Before SFAS 138, the debtor would first hedge the interest rate risk by locking in the combined value of the bond and swap at a fixed amount in marks with a swap in which variable interest was received and fixed interest was paid.
www.nysscpa.org /cpajournal/2001/1100/dept/d115401.htm   (2031 words)

  
 Gaselys - Energy Trading & Risk Management : energy hedging   (Site not responding. Last check: 2007-10-05)
Energy is a major expense for you and energy hedging energy hedging significant impact on energy hedging Investment services provider Gaselys ranks among the very first players operating on the power trading gas hubs and is a leading provider of risk management services.
Specialised energy hedging gas, electricity or oil trading, your primary aim is to work with companies energy hedging an in-depth experience of risk (market, credit and operational) management and control.
It aims to energy hedging one of the ten major electricity traders on the European energy purchase over the next few years.
www.gaselys.com /natural_gas_trading/energy_hedging.htm   (873 words)

  
 Examples.Hedging   (Site not responding. Last check: 2007-10-05)
Computes the mean and standard deviation of the profit/loss from hedging a European call and several other statistics associated with the hedge.
European calls on a constant volatility asset are hedged with analytic deltas and the mean and standard deviation of the hedge profit and loss computed as a function of the volatility sigma used in the computation of the hedge deltas.
In all cases the option hedged is a European call on a single asset or the option to exchange assets.
martingale.berlios.de /javadoc/Examples/Hedging/package-summary.html   (243 words)

  
 Option Pricing & Stock Price Probability Calculators by Peter Hoadley
Barrier option calculator using trinomial lattice: Calculates barrier option prices, and hedge parameters, using a trinomial lattice, and displays the tree structure used in the calculation.
As well as calculating option values and hedge parameters the calculator displays the first six levels of the trinomial tree structure.
Hedge parameters ("Greeks"): Calculated using the trinomial tree, using the specified number of steps and calculation enhancement method.
www.hoadley.net /options/calculators.htm   (2619 words)

  
 The Seattle Times: Home & Garden: Will hedging be formal or natural?
When you're choosing your hedging plants, consider whether you want to let the hedge grow naturally and loosely, or you plan to keep it formally clipped.
Also, be realistic about how much space you have, for hedges can grow wide over time and eat more garden space than ever intended.
Here are a few suggestions, from short hedging ideal for outlining garden beds, to hedges that will grow into walls over time.
seattletimes.nwsource.com /html/homegarden/2002759446_gardeneaston25.html   (503 words)

  
 Delta Hedging
An options strategy that aims to reduce (hedge) the risk associated with price movements in the underlying asset by offsetting long and short positions.
For example, a long call position may be delta hedged by shorting the underlying stock.
Typically, options with high hedge ratios are usually more profitable to buy rather than write since the greater the percentage movement - relative to the underlying's price and the corresponding little time-value erosion - the greater the leverage.
www.investopedia.com /terms/d/deltahedging.asp   (336 words)

  
 Centralized Hedging for Multiple Locations
Some companies adopt centralized hedging in theory, but find the "devil is in the details." They encounter problems assigning futures profits and losses to locations, and end up with location income statements that "can't be right." A lot of time and effort is spent on reconciliation.
In others, locations hedge internally in the conventional futures months, and all spread decisions are made by the hedge desk for its PandL.
Tracking internal hedging results on computer spreadsheets is a "piece of cake." (Tracking results by hand is not recommended.) You'll need a section for futures month for each location.
www.hedger.com /article5.htm   (1382 words)

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