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A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, [1] many types of over-the-counter and derivative products, and futures contracts.
Statements of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, commonly known as FAS 133, is an accounting standard issued in June 1998 by the Financial Accounting Standards Board (FASB) that requires companies to measure all assets and liabilities on their balance sheet at “fair value”.
Hedge funds can be considered risky investments; the expected returns of some hedge fund strategies are less volatile than those of retail funds with high exposure to stock markets because of the use of hedging techniques. Research in 2015 showed that hedge fund activism can have significant real effects on target firms, including improvements ...
Hedging is an investment strategy that is simple in concept but that can be difficult in execution. The primary uses of hedging strategies are to either lock in a profit or to protect against a...
A hedge fund offers people the chance to invest in a portfolio, with returns based on how well the portfolio’s underlying investments do. The fund itself makes most of its money from the fees ...
This notion is captured in the so-called "hedging irrelevance proposition": [16] "In a perfect market, the firm cannot create value by hedging a risk when the price of bearing that risk within the firm is the same as the price of bearing it outside of the firm." In practice, however, financial markets are not likely to be perfect markets.
The CVA desk of an investment bank, whose purpose is to: hedge for possible losses due to counterparty default; hedge to reduce the amount of capital required under the CVA calculation of Basel 3; The "CVA charge". The hedging of the CVA desk has a cost associated to it, i.e. the bank has to buy the hedging instrument.
A major task of the XVA-desk, therefore, [4] [24] is to hedge [13] this exposure; see Financial risk management § Banking. This is achieved by buying, for example, credit default swaps : this "CDS protection" applies in that its value is driven, also, by the counterparty's credit worthiness .