Markets · 6 pages · 12 min
A hedge can fail when the relationship, the counterparty, or the market breaks on the day you need it.
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A hedge is a position meant to gain when a named risk loses, so that the two results offset. It may not show up on the worst day if the historical relationship breaks, the contract does not cover the actual loss, or the hedge itself cannot be traded or honored when the loss arrives. The opening covers basis risk leaves a gap, a cousin is not the position, and counterparties can fail too.
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