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Hedging

Discussion in 'SP5' started by Studystuff, Mar 17, 2021.

  1. Studystuff

    Studystuff Very Active Member

    Hi (Colin I presume..)

    I was hoping you could help me with a small question around the definition of Hedging.

    In the core reading it is defined as "A trade to reduce market risk". However I have come across lines in the core reading for SP5 and Cp1 which use phrases like "Hedge away its mortality risk using longevity swaps" when were talking about liability hedging (rather than asset based hedging). Clearly longevity risk isnt a market risk and this could be extended to cases where we talk about CDS "hedging" credit risk.

    Is it safe to assume that hedging more generally means a trade to reduce risk in general rather than market based risks alone? (Be that risk strictly looking at asset return or asset vs liability performance in the case of liability hedging)

    Thanks!
     
    Studystuff, Mar 17, 2021
    #1
  2. Colin McKee

    Colin McKee ActEd Tutor Staff Member

    Hi, Yes, I would agree. Its a funny sentence that one. Hedging can hedge all sorts of risks, including market risk. If the exam asks for a definition of hedging, I would write the bookwork definition down to be safe, but then add a sentence that states that hedging can hedge a variety of risks away.
     
    Colin McKee, Mar 17, 2021
    #2
  3. Studystuff

    Studystuff Very Active Member

    Cheers Colin, that sounds like a good plan! Thanks for the prompt response
     
    Studystuff, Mar 17, 2021
    #3

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