Introduction to Hedging
From FXPedia
In it’s broadest terms, hedging refers to any investment made specifically to offset or minimize the risk associated with another investment. While a well-crafted hedge strategy can reduce potential risk, there is no way to completely eliminate all risk when it comes to investing.
Stock Price Hedge Using a Pairs Order
A stock price hedge using a pairs order involves the buying of a certain stock in an industry or sector that you expect to outperform other stocks within the same sector. You then take an equal short position in one or more of the stocks you expect to do poorly. See Stock Price Hedge Using a Pairs Order for more information.
Exchange Rate Fluctuation Hedge
There are several approaches you can employ to offset the risk of an exchange rate fluctuation negatively impacting a future payment you expect to receive or – conversely – a future payment you must make. The three methods included in this discussion provide a means to lock-in exchange rates at a known rate to avoid exposure to exchange rate variances.
Interest Rate Hedge
Fixed income investments such as bonds are susceptible to interest rate changes as investors naturally strive to maximize investment returns; as a result, the value of fixed income securities declines as interest rates increase. For this reason, investors may turn to forward rate agreements or interest rate swaps as a means to mitigate the risk of potential interest rate hikes.
Related Links
