Hedge (finance)

hedginghedgehedgedhedgeshedgersunhedgedhedgerhedging marketfinancial hedgehedge against
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment.wikipedia
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Forward contract

forwardsforwardforward transactions
A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive.

Swap (finance)

swapsswapfinancial swap
A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices.

Derivative (finance)

derivativesderivativefinancial derivatives
A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts. Airlines use futures contracts and derivatives to hedge their exposure to the price of jet fuel.
Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive.

Stock trader

equity investmentstock tradingequity trading
A stock trader believes that the stock price of Company A will rise over the next month, due to the company's new and efficient method of producing widgets.
Stock traders may be an agent, hedger, arbitrageur, speculator, stockbroker.

Futures contract

futuresfutures contractsfutures trading
A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts. Public futures markets were established in the 19th century to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy, precious metals, foreign currency, and interest rate fluctuations. Airlines use futures contracts and derivatives to hedge their exposure to the price of jet fuel.
Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position.

Futures exchange

futures marketfuturesfutures markets
Public futures markets were established in the 19th century to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy, precious metals, foreign currency, and interest rate fluctuations.
Speculators absorb some of the risk but hedging appears to drive most commodity markets.

Option (finance)

optionsoptionstock options
A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
If they are combined with other positions, they can also be used in hedging.

Exchange-traded fund

ETFETFsexchange-traded funds
A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
Because ETFs can be economically acquired, held, and disposed of, some investors invest in ETF shares as a long-term investment for asset allocation purposes, while other investors trade ETF shares frequently to hedge risk over short periods or implement market timing investment strategies.

Put option

putput optionsputs
If the trader was able to short sell an asset whose price had a mathematically defined relation with Company A's stock price (for example a put option on Company A shares), the trade might be essentially riskless.
Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging.

Short (finance)

short sellingshortshorting
Since the trader is interested in the specific company, rather than the entire industry, he wants to hedge out the industry-related risk by short selling an equal value of shares from Company A's direct, yet weaker competitor, Company B. To protect your stock picking against systematic market risk, futures are shorted when equity is purchased, or long futures when stock is shorted.
Traders or fund managers may hedge a long position or a portfolio through one or more short positions.

Stock market index future

index futuresstock index futuresequity index futures
The introduction of stock market index futures has provided a second means of hedging risk on a single stock by selling short the market, as opposed to another single or selection of stocks.
Stock index futures are used for hedging, trading, and investments.

Risk

risksdangerrisk-taking
So there is a risk of a future event that affects stock prices across the whole industry, including the stock of Company A along with all other companies.
It is not always obvious if financial instruments are "hedging" (purchasing/selling a financial instrument specifically to reduce or cancel out the risk in another investment) or "speculation" (increasing measurable risk and exposing the investor to catastrophic loss in pursuit of very high windfalls that increase expected value).

Precious metal

precious metalsbullionprecious
Public futures markets were established in the 19th century to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy, precious metals, foreign currency, and interest rate fluctuations.
Gold and silver, and sometimes other precious metals, are often seen as hedges against both inflation and economic downturn.

Over-the-counter (finance)

over-the-counterOTCover the counter
A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
One of them focuses on controlling credit exposure with diversification, netting, collateralisation and hedging.

Insurance

insurance companyinsurance companiesinsurance industry
One common means of hedging against risk is the purchase of insurance to protect against financial loss due to accidental property damage or loss, personal injury, or loss of life.
It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.

Energy derivative

carbon derivativesderivativesenergy
Public futures markets were established in the 19th century to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy, precious metals, foreign currency, and interest rate fluctuations.

Market neutral

Equity market neutralmarket-neutral
It is also a type of market neutral strategy.
An investment strategy or portfolio is considered market-neutral if it seeks to avoid some form of market risk entirely, typically by hedging.

Hedge fund

hedge fundshedge fund managerhedge-fund
The term "hedge fund" originated from the paired long and short positions that the first of these funds used to hedge market risk.

Volume risk

Quantity or volume riskvolume
This strategy minimizes many commodity risks, but has the drawback that it has a large volume and liquidity risk, as BlackIsGreen does not know how whether it can find enough coal on the wholesale market to fulfill the need of the households.
Another relevant cause of volatility risk in volumes and (or) prices of commodities is the financial investment in options or future contracts related to a commodity, which is achieved with the purpose of speculating, rather than hedging in order to reduce the risk of adverse price movements in assets.

Hard currency

sound moneyhard currencieshard money
Safe haven currency is defined as a currency which behaves like a hedge for a reference portfolio of risky assets conditional on movements in global risk aversion.

Coal

coal seamcoal industrycoal-fired
In order to show the difference between these strategies, consider the fictional company BlackIsGreen Ltd trading coal by buying this commodity at the wholesale market and selling it to households mostly in winter.
Coal futures contracts provide coal producers and the electric power industry an important tool for hedging and risk management.

Airline

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Airlines use futures contracts and derivatives to hedge their exposure to the price of jet fuel.
A second financial issue is that of hedging oil and fuel purchases, which are usually second only to labor in its relative cost to the company.

Foreign exchange hedge

currency hedged
A foreign exchange hedge (also called a FOREX hedge) is a method used by companies to eliminate or "hedge" their foreign exchange risk resulting from transactions in foreign currencies (see foreign exchange derivative).

Systematic risk

unsystematic risknon-diversifiable risksystematic market risk
To protect your stock picking against systematic market risk, futures are shorted when equity is purchased, or long futures when stock is shorted.
For countries or regions lacking access to broad hedging markets, events like earthquakes and adverse weather shocks can also act as costly aggregate risks.