Hedge means exactly protection. Perform a hedge in
a portfolio, means reducing the risk or volatility. It may be a foreign exchange
exposure, for those who export, for example, which can be reduced through futures contracts, options, swaps. Currently a
financial protection is actually quite available in the corporative environment
and may be mediated by various financial institutions.
Performing the Hedge is to acquire
contracts with opposite exposures that are on the portfolio's underlying asset which
is unwanted oscillation. For instance, the portfolio can have a debt contract
with a U.S. bank (debt exposure in U.S. dollars) and dollar-selling future. This process reduces the
hedge foreign exchange exposure and inserts time mismatches, because each contract, debt and derivatives
are tied to time and future dates. The hedge is dynamic, that means there
needs to be managed over time. The contracts are locked in a time interval. Matching
perfectly dates of the derivative positions in the portfolio you want to protect
it is quite very difficult, which is called a perfect hedge.
