Also found in:DictionaryThesaurusMedicalLegalIdiomsEncyclopediaWikipedia.Related to hedging:hedging betsCurrency HedgingAstrategydesigned to reduceinvestment riskusingcall optionsputoptions,short-selling, orfutures contracts. A hedge can help lock inprofits. Its purpose is to reduce thevolatilityof aportfolioby reducing the risk ofloss.To reduce theriskof aninvestmentby making anoffsettinginvestment. There are a large number ofhedging strategiesthat one can use. To give an example, one may take along positionon asecurityand thensell shortthe same or a similar security. This means that one willprofit(or at least avoid aloss) no matter which direction the securityspricetakes. Hedging may reduce risk, but it is important to note that it also reduces profit potential.
Hedging is an investment technique designed to offset a potential loss on one investment by purchasing a second investment that you expect to perform in the opposite way.
For example, you might sell short one stock, expecting its price to drop. At the same time, you might buy a call option on the same stock as insurance against a large increase in value.
the act of reducing uncertainty about future (unknown) price movements in aCOMMODITY(rubber, tea, etc.),FINANCIAL SECURITY(share, stock etc.) andFOREIGN CURRENCY. This can be done by undertaking forward sales or purchases of the commodity, security or currency in theFORWARD MARKET; or by taking out anOPTIONwhich limits the option holders exposure to price fluctuations. SeeEXCHANGE RATE EXPOSUREHEDGE FUND.
the act of reducing uncertainty about future (unknown) price movements in aCOMMODITY(rubber, tea, etc.),FINANCIAL SECURITY(share, stock, etc.) orFOREIGN CURRENCY. This can be done by undertaking forward sales or purchases of the commodity, security or currency in theFUTURES MARKET, or by taking out anOPTIONthat limits the option-holders
exposure to price fluctuations. SeeEXCHANGE RATE EXPOSURE.
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transaction is a transaction that a taxpayer enters into in the ordinary course of-its trade or business to manage certain risks of ordinary property, borrowings or ordinary obligations; see Keg, s.
Hedge identification and timing rules – traps for the unwary
Consistent with these suggestions, the proposed
regulations provide a general rule that, for purposes of section 1221 of the Internal Revenue Code, the risk of one member of a consolidated group is to be treated as a risk of the other members of the group as if all the members of the group were members of a single corporation.
Effective date of proposed consolidated group hedging regulations
In TEIs comments on the temporary and proposed regulations for
transactions, the Institute summarized the history of the development of the tax law affecting
Proposed hedging regulations under Sections 446 and 1221
138, Accounting for Certain Derivative Instruments and Certain
Activities–an Amendment of FASB Statement no.
TEI commends the Treasury and IRS for responding to the need for guidance on the income tax treatment of business
activities in which the entity designates a derivative or a nonderivative financial instrument as a hedge of exposure for which FASB Statement No.
transactions qualify for ordinary income or loss treatment depends on whether the
Ordinary treatment now available for hedging transactions
strategies and the mathematical analyses supporting them can quickly become exceedingly complex, the exposures that create accounting difficulties and the strategies you can use to correct them fall into only a few broad, recognizable categories.
In addition, the FASB amendment expanded the normal purchases and normal sales exception, redefined the specific risks that can be hedged and allowed the use of intercompany derivatives as
485 US 212 (1988), which created the possibility that losses from
activities could result in capital loss treatment, while ordinary income was recognized on the property being hedged.
New hedging regulations designed to minimize character mismatch for tax purposes
The table on page 42 lists some key accounting pronouncements on
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