Hedging

Definition:

The practice of making an investment or purchasing a financial product with the intention of insulating a party from the risk of fluctuations in the prices of, for example, securities, currencies, and Interest Rates.

For example, in the context of Credit Agreements, a borrower under a Floating Rate loan may enter into a Hedge Agreement in order to ensure that it always makes Fixed Rate payments by paying the counterparty (referred to as the “hedge counterparty”) a Fixed Rate payment plus a service fee. The hedge counterparty then makes the Floating Rate payments, effectively taking on the risk of a rise in Interest Rates.

See also Hedge Agreement.

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