Definition of 'Natural Hedge'
Natural hedges can be used to reduce risk in a variety of ways. For example, a company that exports goods might use a natural hedge by buying foreign currency forward. If the value of the foreign currency goes down, the company will make a profit on the forward contract, offsetting the loss on its exports.
Natural hedges are not without their limitations. For example, they may not be effective in all situations. In addition, they may require the use of assets that are not easily available or that are not liquid.
Despite these limitations, natural hedges can be a valuable tool for risk management. They can help companies and investors reduce their exposure to market volatility and improve their overall financial performance.
Here are some additional examples of natural hedges:
* A company that sells electricity might use a natural hedge by entering into a long-term contract to purchase natural gas. If the price of electricity goes up, the price of natural gas will likely go up as well, offsetting the company's losses.
* A farmer might use a natural hedge by planting different crops that mature at different times. If one crop fails, the farmer will still have other crops to sell.
* A company that owns a fleet of trucks might use a natural hedge by purchasing fuel futures contracts. If the price of fuel goes up, the company will make a profit on its futures contracts, offsetting the increase in its fuel costs.
Natural hedges can be a valuable tool for risk management. However, it is important to understand their limitations before using them.
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