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Hedging

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The New Palgrave Dictionary of Economics

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Abstract

Hedging is defined with a state-space model of risky outcomes. Full and partial hedging are compared, and the feasible set of hedging positions related to the available collection of traded assets. Three types of counter-parties for hedging trades are distinguished. The risk premium for a hedging asset is defined, and its relationship to economy-wide risk factors explained. The case of mean-variance preferences provides a useful formula for the optimal hedge position. Corporations undertake many hedging transactions, even though the shareholders of the corporation do not typically benefit from any risk reduction. Some explanations of corporate hedging are set out.

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Authors and Affiliations

  1. http://link.springer.com/referencework/10.1057/978-1-349-95121-5

    Gregory Connor

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  1. Gregory Connor
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Connor, G. (2018). Hedging. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_1174

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