Hedge (finance) - Related Concepts

Related Concepts

• Forwards: A contract specifying future delivery of an amount of an item, at a price decided now. The delivery is obligatory, not optional.
• Forward rate agreement (FRA): A contract specifying an interest rate amount to be settled at a pre-determined interest rate on the date of the contract.
• Option (finance): similar to a forward contract, but optional.
  • Call option: A contract that gives the owner the right, but not the obligation, to buy an item in the future, at a price decided now.
  • Put option: A contract that gives the owner the right, but not the obligation, to sell an item in the future, at a price decided now.
• Non-deliverable forwards (NDF): A strictly risk-transfer financial product similar to a Forward Rate Agreement, but used only where monetary policy restrictions on the currency in question limit the free flow and conversion of capital. As the name suggests, NDFs are not delivered but settled in a reference currency, usually USD or EUR, where the parties exchange the gain or loss that the NDF instrument yields, and if the buyer of the controlled currency truly needs that hard currency, he can take the reference payout and go to the government in question and convert the USD or EUR payout. The insurance effect is the same; it's just that the supply of insured currency is restricted and controlled by government. See Capital Control.
• Interest rate parity and Covered interest arbitrage: The simple concept that two similar investments in two different currencies ought to yield the same return. If the two similar investments are not at face value offering the same interest rate return, the difference should conceptually be made up by changes in the exchange rate over the life of the investment. IRP basically provides the math to calculate a projected or implied forward rate of exchange. This calculated rate is not and cannot be considered a prediction or forecast, but rather is the arbitrage-free calculation for what the exchange rate is implied to be in order for it to be impossible to make a free profit by converting money to one currency, investing it for a period, then converting back and making more money than if a person had invested in the same opportunity in the original currency.
• Hedge fund: A fund which may engage in hedged transactions or hedged investment strategies.