For a derivative contract, the most frequently used hedging strategy
in the financial industry is delta hedging.
As explained above, many types of transactions may constitute a hedging strategy
in economic terms.
If the decision-maker is risk-averse or if the outcome distributions are normally distributed, then the familiar mean-variance criterion can be used to select the optimal hedging strategy
As you know, the right hedging strategy
for your company depends on the exposure, risk reduction, upside potential, market conditions and cost.
The system should give you an idea of your credit exposure (that is, the mark-to-market value), too, and an estimate of the cost of your hedging strategy
With that in mind, remember that a good hedging strategy
is really an integrated approach to financial risk management that includes identifying risks, controlling the type and amount of hedging strategies and addressing the tax and accounting issues.
Interest-Rate Swaps--If you think rates are more likely to rise during your borrowing period, an interest-rate swap to create a "synthetic" fixed rate for your outstanding debt is a good hedging strategy
Accordingly, management has made slight changes to the assumptions underlying the valuation as part of the implementation of the Company's hedging strategy
in order to align the assumptions used in its hedge strategy with the valuation methodology.
As for managing price volatility, Lukas said that KeySpan's contracting and hedging strategy
served it well last year.
Management is reviewing the Company's application of the requirements of Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" for all of the derivative transactions used in its hedging strategy
to manage interest rate risks from 2001 to the third quarter of 2005.
A currency hedging strategy
aims to neutralize currency exposure resulting from the ownership of international assets through the use of a passive currency management program.
With the establishment of a new $75 million cash reserve account, the reduced management services contract costs, and LIPA's ongoing fuel hedging strategy
(more than 2/3 fuel exposure hedged through 2007), LIPA hopes to be able to freeze electric consumers' rates for the next two years.