Financial Terms
Dynamic hedging

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Definition of Dynamic hedging

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Dynamic hedging

A strategy that involves rebalancing hedge positions as market conditions change; a
strategy that seeks to insure the value of a portfolio using a synthetic put option.

Related Terms:

Delta hedge

A dynamic hedging strategy using options with continuous adjustment of the number of options
used, as a function of the delta of the option.

Cross hedging

The practice of hedging with a futures contract that is different from the underlying being

Dynamic asset allocation

An asset allocation strategy in which the asset mix is mechanistically shifted in
response to -changing market conditions, as in a portfolio insurance strategy, for example.


A strategy designed to reduce investment risk using call options, put options, short selling, or futures
contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by
reducing the risk of loss.


Reducing one's exposure to risk by buying and selling contracts for future delivery (of foreign currency, for example) at a price that is determined now.

Hedging demands

Demands for securities to hedge particular sources of consumption risk, beyond the usual
mean-variance diversification motivation.

Additional hedge

A protection against borrower fallout risk in the mortgage pipeline.

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Average (across-day) measures

An estimation of price that uses the average or representative price of a
large number of trades.

Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies

Cross-border risk

Refers to the volatility of returns on international investments caused by events associated
with a particular country as opposed to events associated solely with a particular economic or financial agent.

Cross default

A provision under which default on one debt obligation triggers default on another debt

Cross holdings

One corporation holds shares in another firm.

Cross rates

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
that are both expressed in terms of a third currency.

Cross-sectional approach

A statistical methodology applied to a set of firms at a particular point in time.

Crossover rate

The return at which two alternative projects have the same net present value.


Also called the hedge ratio, the ratio of the change in price of a call option to the change in price of the
underlying stock.

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The rate of change of the price of a derivative security relative to the
price of the underlying asset; i.e., the first derivative of the curve that relates
the price of the derivative to the price of the underlying security.

Delta neutral

The value of the portfolio is not affected by changes in the value of the asset on which the
options are written.


A transaction that reduces the risk of an investment.


A securities transaction that reduces or offsets the risk on an existing
investment position.

Hedge fund

A fund that may employ a variety of techniques to enhance returns, such as both buying and
shorting stocks based on a valuation model.

Hedge inventory

Excess inventories kept on hand as a buffer against contingent

Hedge ratio (delta)

The ratio of volatility of the portfolio to be hedged and the return of the volatility of the
hedging instrument.

Hedged portfolio

A portfolio consisting of the long position in the stock and the short position in the call
option, so as to be riskless and produce a return that equals the risk-free interest rate.

Long hedge

The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used
by processors or exporters as protection against an advance in the cash price. Related: hedge, short hedge

Money market hedge

The use of borrowing and lending transactions in foreign currencies to lock in the
home currency value of a foreign currency transaction.

Perfect hedge

A financial result in which the profit and loss from the underlying asset and the hedge position
are equal.

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Sell hedge

Related: short hedge.

Short hedge

The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of
an approximately equal amount of the actual financial instrument or physical commodity.
Related: Long hedge.







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