What it means
Start with the exposure
A hedge should be evaluated against a particular amount, asset, time horizon and obligation. An instrument that offsets one risk may not track another exposure accurately. A business policy that reduces holdings is also distinct from entering a derivative contract.
Costs and remaining risks
Hedges can create transaction costs, collateral requirements, counterparty exposure and losses when the hedge and underlying position move differently. Operational controls and authority to use the instrument matter. The existence of a hedge does not make a payment business or investment risk-free.
Related concepts
In practice
A concrete example
A business identifies a future foreign-currency obligation before evaluating whether an approved risk-management instrument matches that exposure.
Technical notes & boundaries
This definition does not recommend a trade. Derivatives can be complex and risky, and eligibility or regulatory requirements vary by instrument and jurisdiction.
Go to the source.
Original references used for this definition. Product details and standards can change.