Filter by Categories
Accounting
Banking

Derivatives




Static Hedge


A hedge that requires no changes to its components once it is initiated. That is, the hedge will not need to be re-balanced as the price and volatilities of the instruments and investments being hedged change over time. For example, an investor may use futures contracts to hedge an existing position in a particular commodity or currency. This hedge has the effect of eliminating the price risk or the foreign exchange risk, respectively.

However, a static hedge cannot be effective indefinitely or for long time. As such, it will need to be re-adjusted or re-constructed from scratch due to the fact that its components eventually fall due, expire, or mature. Nevertheless, a wide range of financial instruments and products cannot be sufficiently hedged using this methodology. Here is where the so-called dynamic hedge is called for.



ABC
Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
Watch on Youtube
Remember to read our privacy policy before submission of your comments or any suggestions. Please keep comments relevant, respectful, and as much concise as possible. By commenting you are required to follow our community guidelines.

Comments


    Leave Your Comment

    Your email address will not be published.*