Risk glossary

A natural hedge is the reduction in risk that can arise from an institution’s normal operating procedures. A company with significant sales in one country holds a natural hedge on its currency risk if it also generates expenses in that currency. For example, an oil producer with refining operations in the US is (partially) naturally hedged against the cost of dollar-denominated crude oil.

While a company can alter its operational behaviour to take advantage of a natural hedge, such hedges are less flexible than financial hedges.

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