Natural Hedge

A natural hedge is created through natural means rather than synthetic means i.e. using financial derivatives. A natural, though imperfect, hedge for an investor might be diversifying the portfolio by maintaining positions in asset classes that are negatively correlated i.e. which move in different directions on the back of market events; e.g. equity and bond positions. In a business context, companies can achieve natural currency hedges by equalising the size of accounts receivable and accounts payable in a given foreign currency. This would naturally neutralise FX risk as gains or losses emanating from appreciation or depreciation would be inversely correlated on each side of the balance sheet when converting back to the company’s operating currency.