Hedging: Measuring the Initial Risk

Before initiating a risk management program, a financial institution needs to evaluate the types of risk that are present. The definition of risk can vary depending on the corporation or division. If needs and desires are specified early, a less costly and better matching hedge can be placed. Hedgin...

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Bibliographic Details
Published in:Financial managers' statement 1991-07, Vol.13 (4), p.14
Main Author: Howe, Donna Marie
Format: Article
Language:English
Subjects:
Beta
Characteristics
Financial institutions
Hedging
Measurement
Risk management
Standard deviation
Volatility
Online Access:Get full text
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Summary:Before initiating a risk management program, a financial institution needs to evaluate the types of risk that are present. The definition of risk can vary depending on the corporation or division. If needs and desires are specified early, a less costly and better matching hedge can be placed. Hedging is the act of reducing a position's risk by offsetting it with another position that is similar in certain ways. Since various market behaviors are attached to each concept of risk, care must be taken in measuring risk, and risk characteristics must be defined. Types of risk on a macro level are business risk and financial risk. One standard method of measuring risk is volatility, the historic degree of price or yield change. Standard deviation measuring is a similar concept, but it assumes that price volatility follows a particular pattern of price distribution over time. The beta measure is usually associated with a comparison of an individual stock versus the entire stock market.
ISSN:0887-4808