Financial Derivative Terms - H

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Hedge Effectiveness: The extent to which a hedge transaction results in the offsetting changes in fair value or cash flow that the transaction was and is intended to provide as identified by the hedging entity. For example, a hedge is considered to be highly effective if the changes in fair value or cash flow of the hedged item and the hedging derivative offset each other to a significant extent. Under FAS 133 only the portion of a transaction that is considered effective may qualify for hedge accounting treatment.
Hedge Fund: A private investment vehicle which is often used by pension funds, corporate institutions or very high net worth individuals and private partnerships that use strategies such as equity long/short, short selling and market neutral. Hedge funds make extensive use of leverage and derivatives to reduce risk and enhance returns.
Hedge Ratio: The ratio of the change of value of a hedging instrument (derivative) to the change of the price of the position being hedged (underlying).
Hedging: An investment strategy that uses investments to minimize the chances of a potential investment loss by taking an offsetting position using a related derivative whose value would change inversely with respect to the investment. The goal of the strategy is not to make money but to protect from financial losses and can be thought of as a type of insurance.
Historic Volatility: The standard deviation of the change in the average price of the underlying instrument over recent history.
Holder: The registered owner of a security.
Holding Cost: The annualized expenses of keeping an investment.

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