Unhedged

Unhedged refers to a financial position or exposure that has not been offset or protected by hedging instruments such as forwards, futures, options, or swaps. An unhedged position remains exposed to market risk in the underlying variable, including price movements, interest rate changes, or currency fluctuations. Hedging is the use of derivatives or other strategies to reduce or eliminate this risk, while an unhedged position lacks such offsetting positions.

Unhedged exposures occur in several contexts. Foreign exchange: a company with revenue or assets in a foreign currency but not using hedges faces currency risk that can affect reported earnings and cash flow when translated or realized. Commodity exposure: a business relying on inputs priced in a different currency or market may experience volatile costs without hedging. Interest rate risk: lenders or borrowers with unhedged rate exposure can see payments or income vary with rate moves. Equity risk: investors holding international assets or currencies on an unhedged basis bear additional currency risk on top of market risk.

Reasons to remain unhedged include cost considerations, sufficient risk tolerance, regulatory or operational constraints, or a belief that favorable market moves will outweigh potential losses. Conversely, hedging incurs costs and may reduce potential gains, and some entities aim for neutrality or protection against adverse moves.

In practice, firms often assess unhedged exposures and may disclose sensitivity analyses in risk reports. The choice between unhedged and hedged positions reflects a balance of risk tolerance, expected market directions, and the cost versus benefit of hedging strategies.