cash flow hedge

Definition

A transaction done to offset risks from the variability of cash flow that would otherwise negatively affect profits. For example, an oil importer projects that the price per barrel of oil will decrease in the future, thus reducing his profits. The importer buys put options for $100 that allows him to sell oil at a price of $50 per barrel next month. On the next month, if the price of oil is $40 per barrel, then the importer gains from the change in price. In this transaction, the put option hedges the risks of price variability.

Use cash flow hedge in a sentence

You may find that it is right to try a cash flow hedge that may protect you from to much liability on your end.

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The cash flow hedge was very important to us and we had a lot of different things that we needed to pay attention to.

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The company would often do cash flow hedges to make sure they covered their risk. That way if something were to happen, they would be able to sell the option.

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