Hedging
Reducing the impact of an adverse move in one exposure through another instrument or transaction.
Plain languagePractical exampleConnected reading
01
What is it?
Reducing the impact of an adverse move in one exposure through another instrument or transaction.
02
Why does it matter?
It can limit cash-flow and balance-sheet uncertainty but introduces cost and basis risk.
03
How should it be read?
Measure the match in amount, maturity, currency and underlying exposure.
04
Common mistake
Assuming a hedge removes all risk and opportunity cost.
A simple example
A company with foreign-currency debt may use forward purchases to partly hedge currency appreciation.