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.
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