Making an investment to reduce the risk of adverse price
movements in an asset. Normally, a hedge consists of taking
an offsetting position in a related security, such as a
Funding agreements are marketed to mutual fund companies
and municipal reinvestments. These products are generally
used for their security and flexibility as they can be
altered to meet the specific cash-flow needs of the
In finance, a security whose price is dependent upon or
derived from one or more underlying assets. The derivative
itself is merely a contract between two or more parties.
Its value is determined by fluctuations in the underlying
asset. The most common underlying assets include stocks,
bonds, commodities, currencies, interest rates and market
indexes. Most derivatives are characterized by high
Derivatives are generally used to hedge risk, but can also
be used for speculative purposes. For example, a European
investor purchasing shares of an American company off of an
American exchange (using American dollars to do so) would
be exposed to exchange-rate risk while holding that stock.
To hedge this risk, the investor could purchase currency
futures to lock in a specified exchange rate for the future
stock sale and currency conversion back into euros.
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Other Finance Interview Questions
What could a company do with excess cash on the balance sheet?